CASE STUDY 3Gain or loss on de recognitionOn 1st Jan 2005, Janaki Ltd acquiredproduction equipment in the amount ofRs.2,50,000. The following further costs wereincurred: RsDelivery 18,000Installation 24,500General administration 3,000costs of an indirect natureThe installation and setting up period took 3months and a further amount of Rs.21,000 wasspent on start-up costs directly related tobringing the asset to its working condition.Monthly managerial reports indicated that forthe first 5 months, the production quantitiesfor this equipment resulted in an initialoperation loss of Rs 15,000 because of smallquantities produced. The months thereaftershow much more positive results.The equipment has an estimated useful life of14 years and a residual value of Rs18,000.Present value of estimated dismantlingcosts amount of Rs12,500.
The company adopted straight linedepreciation. The asset was sold on 30.6.09 forRs.3,00,000. The company follows calendaryear as its accounting period. Incrementalborrowing rate of the company is 10% p.a.What value is originally recorded as thehistorical cost of the asset and what are theannual charges in the income statementrelated to the consumption of the economicbenefits embodied in the assets?Find out gain/loss of derecognition.How should the company recognize gain andreverse the decommissioning liability?