QUESTION THREE A mine acquires a machine that is used to sink mine shafts. The asset is the first of its kind to be used in Zambia. The asset is imported and installed at the mine. The details of the costs incurred to prepare the asset for use are as follows: ZMW'000 Cost paid to supplier to deliver the asset to Nakonde border post 5 000 Import tax levied on import of machine at the border 450 Cost paid to supplier to transport company to transport the asset from the border to the mine 250 20 of the company's current employees were used for 2 months to build a foundation and install the machine. The annual cost of one of the employees 90 General operating costs of the mine for 2 months 1 500 A technician supported the employees during the installation of the machine. The cost of consultations 100 After the completion of the installation the mine invited its most important customers to a function to commission the asset. The cost of the function 50 During the function, the machine was switched on for the first time to sink the first mine shaft. Management will use the first as an opportunity to establish whether the machine operates as intended. It requires approximately 2 years to complete the shaft before it can be utilised. The shaft will be used for 20 years for mining operations. The cost of the first shaft 2 000 The shaft will cost the mine approximately ZMW600,000 more than the normal costs for other shafts, due to technical reasons. Show the total cost that is attributable to the mining machine. For the cost that you deem not worth of capitalisation to the machine please provide your reasons for not capitalising them.
QUESTION THREE
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A mine acquires a machine that is used to sink mine shafts. The asset is the first of its kind to be used in Zambia. The asset is imported and installed at the mine. |
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The details of the costs incurred to prepare the asset for use are as follows: |
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ZMW'000 |
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Cost paid to supplier to deliver the asset to Nakonde border post |
5 000 |
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Import tax levied on import of machine at the border |
450 |
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Cost paid to supplier to transport company to transport the asset from the border to the mine |
250 |
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20 of the company's current employees were used for 2 months to build a foundation and install the machine. The annual cost of one of the employees |
90 |
|
General operating costs of the mine for 2 months |
1 500 |
|
A technician supported the employees during the installation of the machine. The cost of consultations |
100 |
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After the completion of the installation the mine invited its most important customers to a function to commission the asset. The cost of the function |
50 |
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During the function, the machine was switched on for the first time to sink the first mine shaft. Management will use the first as an opportunity to establish whether the machine operates as intended. It requires approximately 2 years to complete the shaft before it can be utilised. The shaft will be used for 20 years for mining operations. The cost of the first shaft |
2 000 |
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The shaft will cost the mine approximately ZMW600,000 more than the normal costs for other shafts, due to technical reasons. |
|
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Show the total cost that is attributable to the mining machine. For the cost that you deem not worth of capitalisation to the machine please provide your reasons for not capitalising them. |
Capitalized Cost Associated with Machine Installation
If a corporation anticipates using an item over a lengthy period of time, the cost of the item is allocated to the cost of an asset rather than an expense in accounting. The cost of the item or fixed asset is capitalized and amortized or depreciated over its useful life as opposed to being expensed.
Items of property, plant, and equipment are typical instances of capitalized costs in corporations. For instance, if a business purchases a machine, a structure, or a computer, the cost would be capitalized as a fixed asset on the balance sheet rather than expensed. Additional costs incurred when creating a fixed asset may also be capitalized. These include the cost of the construction's materials, sales taxes, labor, transportation, and interest.
A business must use assets in the regular course of its operations and receive economic advantage from them in order to capitalize cost. Inventory, for instance, cannot be considered a capital asset because businesses often anticipate to sell their inventories within a year.
Capitalized costs have an impact on the company's income statement over the course of the asset's useful life since they are depreciated or amortized over a certain number of years. Capitalized costs often have an immediate financial impact, but all subsequent amortization or depreciation costs are non-cash charges.
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