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

Narmada Pharma Ltd. owns a plant with an original cost of ₹20,00,000, depreciated at 10% on straight line basis with no residual value. At the end of year 4 (accumulated depreciation ₹8,00,000), the company replaced a major component whose original cost was ₹4,00,000 with a new component costing ₹5,00,000. The replaced component's cost is reliably identified and is depreciated over the same life as the plant. How much loss should be recognised on derecognition of the old component, and what is the carrying amount of the plant after the replacement?

The loss on derecognition is ₹2,40,000 and the plant's carrying amount becomes ₹14,60,000. The old component's carrying amount is ₹4,00,000 less ₹1,60,000 depreciation. That is written off, and the new component's ₹5,00,000 is capitalised.

  1. ALoss ₹2,40,000; plant carrying amount ₹14,60,000Correct
  2. BLoss ₹4,00,000; plant carrying amount ₹13,00,000
  3. CLoss ₹2,40,000; plant carrying amount ₹9,60,000
  4. DLoss ₹1,60,000; plant carrying amount ₹15,40,000

Explanation

The old component's accumulated depreciation is 4,00,000 × 10% × 4 = ₹1,60,000, so its carrying amount is ₹2,40,000, all of which is lost on derecognition. Plant carrying amount before replacement is 20,00,000 − 8,00,000 = ₹12,00,000. After replacement it is 12,00,000 − 2,40,000 + 5,00,000 = ₹14,60,000. Option ₹1,60,000 wrongly treats depreciation as the loss.

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