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

Rudra Steels Ltd began constructing a furnace on 1 April 2025. Costs: materials Rs 30,00,000, labour Rs 10,00,000, and Rs 2,00,000 of abnormal wastage of materials. Site preparation Rs 3,00,000. Initial operating losses of Rs 1,50,000 were incurred during trial run before it reached planned capacity. Rs 4,00,000 of general administration overheads were allocated to the project. Trial production sold during testing earned net proceeds of Rs 1,00,000 after testing costs. The furnace was ready on 31 March 2026. At what amount should the furnace be capitalised, treating the AS 10 position as: net trial proceeds are credited to profit and loss, not deducted from cost?

The furnace is capitalised at Rs 43,00,000, being materials Rs 30,00,000, labour Rs 10,00,000 and site preparation Rs 3,00,000. Abnormal wastage, initial operating losses and general administration overheads are not directly attributable costs, and net trial proceeds go to profit and loss as stated.

  1. ARs 40,00,000
  2. BRs 43,00,000Correct
  3. CRs 41,50,000
  4. DRs 45,00,000

Explanation

Capitalise materials 30,00,000 + labour 10,00,000 + site preparation 3,00,000 = 43,00,000. Abnormal wastage, initial operating losses and general administration overheads are excluded. Trial proceeds are taken to profit and loss as stated, so no deduction is made. Rs 45,00,000 wrongly adds abnormal wastage.

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