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CMA Foundation · Fundamentals of Financial and Cost Accounting · Four Frameworks of Accounting and Forms of Organization

Ritu Textiles buys a machine for ₹5,00,000. Under the accounting standard on property, plant and equipment, it also spends ₹20,000 on freight to bring the machine to the factory, ₹30,000 on installation and ₹10,000 on staff training for operating it. At what amount should the machine be recorded?

The machine should be recorded at ₹5,50,000, being the purchase price of ₹5,00,000 plus freight of ₹20,000 and installation of ₹30,000. Staff training of ₹10,000 is not a directly attributable cost of bringing the asset to working condition, so it is charged to expense.

  1. A₹5,60,000
  2. B₹5,50,000Correct
  3. C₹5,30,000
  4. D₹5,20,000

Explanation

Cost includes purchase price plus directly attributable costs of bringing the asset to working condition: 5,00,000 + 20,000 freight + 30,000 installation = ₹5,50,000. Training costs are not part of the asset cost and are expensed. Including training gives ₹5,60,000, which is therefore wrong.

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