International Financial Reporting Standards_guide.pdf

Chapter 10 Property, Plant, and Equipment (IAS 16) 119
EXAMPLES: PROPERTY, PLANT, AND EQUIPMENT
EXAMPLE 10.1
An entity begins the year with assets of $8,500, consisting of $500 in cash and $8,000 in plant
and equipment. These assets are financed through current liabilities of $200 and $2,000 of 7
percent long-term debt, and $6,300 of common stock. During the year, the entity has sales of
$10,000 and incurs $7,000 of operating expenses (excluding depreciation), $1,000 of construction
costs for new plant and equipment, and $140 of interest expense. The entity depreciates
its plant and equipment over 10 years (no residual [salvage] value). Ignoring the effect of
income taxes, develop pro forma Statements of Comprehensive Income and Statements of
Financial Position for the company’s operations for the year if it expenses the $1,000 of construction
costs and if it capitalizes these costs.
The effect of the expense-or-capitalize-cost decision on the company’s shareholders’ equity,
pretax income, pretax operating and investing cash flows, and key financial ratios should be
analyzed.
It is assumed that construction costs will be depreciated over four years and that the resulting
asset will be ready for use on the first day of Year 1.
The results of the expense-or-capitalize-cost decision should be summarized.