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CA Intermediate · Advanced Accounting · AS 10 Property, Plant and Equipment

Kaveri Industries Ltd acquired a plant in exchange for its old plant. The old plant had a book value of Rs 6,00,000 and a fair value of Rs 8,00,000. The fair value of the new plant received was Rs 8,50,000, and Kaveri paid Rs 50,000 in cash. The exchange has commercial substance and the fair value of the asset given up is clearly evident. As per AS 10, at what amount should the new plant be recorded, and what is the gain on the exchange?

The new plant is recorded at Rs 8,50,000 with a gain of Rs 2,00,000. When fair value of the asset given up is evident, cost equals that fair value (Rs 8,00,000) plus cash paid (Rs 50,000). The gain is the fair value of the old plant less its book value of Rs 6,00,000.

  1. ARs 8,50,000 recorded; gain Rs 2,00,000Correct
  2. BRs 6,50,000 recorded; gain nil
  3. CRs 8,50,000 recorded; gain Rs 2,50,000
  4. DRs 8,00,000 recorded; gain Rs 2,00,000

Explanation

Cost is the fair value of the asset given up plus cash paid: 8,00,000 + 50,000 = 8,50,000. Gain on the old plant = fair value 8,00,000 less book value 6,00,000 = 2,00,000. The Rs 2,50,000 option wrongly measures the gain against the cash-inclusive amount.

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