Capitalising expenditure example

Page 1

In the year ended 30 September 20X1 Universal Power plc purchased a

turbine from a company based in America. The American company built

the turbine in accordance with detailed specifications supplied by

Universal Power plc.

The design and acquisition of the turbine was largely funded from

retained earnings but the costs relating to installation, testing and

modification of the turbine, work which took place at the main site of

Universal Power plc in the UK over a period of four months, was financed

by a short-term loan specific to the project at a rate of 15% per annum.

The following costs are associated with the acquisition and installation of

the turbine:

 Engineer’s fees for design of the turbine £50,000

 Purchase price of turbine (excluding transport costs) £2,250,000

 Import duties, shipping and other transport costs £240,000

 Site preparation £50,000

 Installation, testing and modification of turbine £480,000

 Maintenance agreement with the American company to carry out

routine testing, repairs and maintenance of turbine £10,000 per

annum.

 Loan to finance the installation of the turbine £600,000 (four

months at 15% per annum)

The capitalised costs of the turbine were recorded as follows:

£

Engineer’s fee 50,000

Purchase price 2,250,000

Import duties, shipping and other transport costs 240,000

Site preparation 50,000

Installation, testing and modification 480,000

Borrowing costs (£600,000 x 15% = £90,000 ÷ 12 x 4) 30,000

Capitalised cost 3,100,000