Question

QUESTION UNICHEM LIMITED, a company listed in the industrial sector of the JSE Limited acquired new technological manufacturing equipment to enhance their Vanderbijlpark facility. This equipment will be used to manufacture a new line of inventories. Unichem Limited decided to introduce this new line of inventories as its market research department indicated that there is a demand for these products and that Unichem Limited will be able to produce the inventories at a cost which will be significantly lower than the retail value. The company purchased the equipment on 1 March 2018 for cash at a market related cost. Unichem Limited estimates that the equipment will be used for 5 years. REQUIRED: Discuss the recognition of the equipment acquired on 1 March 2018 in the accounting records of Unichem Limited with reference to the Conceptual Framework for Financial Reporting (2018). You can accept that the equipment complies with the definition of an asset. Note: Do not discuss the credit entry at initial recognition. - Do not define the term recognition. - Do not discuss the unit of account of the right or obligation. - Assume that the benefit of recognising the equipment (if applicable) outweighs the cost of recognition thereof. Therefore, do not discuss the cost constraints of recognition decisions. - Assume that the substance of the rights or obligations are clear from the legal form. Therefore, do not discuss substance over form considerations. - Assume there is no measurement uncertainty. Therefore, do not discuss measurement uncertainty

The conceptual framework is with regards to the recognization of an asset in the accounting field

Answer 1

Property, Plant and Equipment are tangible assets which are used in production or supply of goods or services supplied by the company or for administrative purpose. The useful life of asset is more than one year.

The company recognise the cost of Equipment only when it is for economic benefit of the company and the cost can be measured.

Initially the Equipment is measured at cost. Cost of Assets includes Purchase price of asset and all other expenses which are required to bring the assets in working condition like Delivery cost, handling cost, Site preparation cost and any other cost that is required to do. If use of asset is deferred and asset is purchased by borrowing money then interest expenditure is also added in asset cost.

In subsequent period the assets is measured on the basis of 2 accounting model. These models are as follows:

Cost Model: The assets should be shown in financial statement at cost less depreciation and any accumulated impairment losses.

Revaluation model: The value of assets should be revalued at the end of every year. The fair value of the assets is it’s fair value in the market less any subsequent accumulated depreciation of the assets or any impairment loss. When the values get increased then it will increase the profit of the company and if prices decrease then it will decrease the profit.