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CMA Intermediate · Corporate Accounting and Auditing · Inventories (Ind AS 2)

Kaveri Steel Ltd used its own steel plates costing Rs 12,00,000 (inventory) to build a storage tank for its factory. The tank is classified as property, plant and equipment with a useful life of 10 years and nil residual value, straight-line depreciation. As per Ind AS 2, how is the Rs 12,00,000 treated?

The steel cost becomes part of the tank and is expensed over the tank's useful life. Ind AS 2 states that inventories allocated to another asset are recognised as an expense during that asset's useful life, so Rs 1,20,000 is charged yearly over 10 years.

  1. AExpensed fully as cost of materials consumed in the year of construction
  2. BAllocated to the tank asset and recognised as an expense over its useful life, i.e. Rs 1,20,000 per yearCorrect
  3. CCharged to retained earnings directly
  4. DKept as inventory because the plates were originally held for sale

Explanation

Inventories allocated to another asset, such as self-constructed PPE, are recognised as an expense during the useful life of that asset. The Rs 12,00,000 is capitalised in the tank and depreciated over 10 years, giving Rs 1,20,000 annually. Immediate expensing is wrong because the cost now forms part of the asset.

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