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

Kaveri Textiles Ltd exchanged an old loom, with a book value of ₹6,00,000 and a fair value of ₹8,00,000, for a new loom and paid additional cash of ₹1,50,000. The fair value of the asset given up is the more clearly evident figure. At what cost should the new loom be recorded under AS 10?

The new loom is recorded at ₹9,50,000. In an exchange, cost is measured at the fair value of the asset given up, ₹8,00,000, plus the cash paid, ₹1,50,000. The ₹2,00,000 difference between fair value and book value of the old loom is recognised as a gain in profit and loss.

  1. A₹7,50,000
  2. B₹8,00,000
  3. C₹9,50,000Correct
  4. D₹11,50,000

Explanation

When an asset is acquired in exchange, its cost is the fair value of the asset given up (when that is more clearly evident) plus the cash paid: 8,00,000 + 1,50,000 = 9,50,000. The gain of 2,00,000 (8,00,000 − 6,00,000) on the old loom goes to profit and loss. Using book value plus cash gives 7,50,000, which ignores fair value. Adding the gain on top again gives 11,50,000, which double counts it.

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