The HUL Company Limited decides to replace one of its old plants with a modern o
ID: 2374787 • Letter: T
Question
The HUL Company Limited decides to replace one of its old plants with a modern one with a larger capacity. The plant when installed in 1980 cost the company Rs. 24 lakhs, the components of materials, labour and overheads being in the ratio of 5:3:2. It is ascertained that the costs of materials and labour have gone up by 40% and 80% respectively. The proportion of overheads to total costs is expected to return the same as before. The cost of the new plant as per improved design is Rs. 60 lakhs and in addition, material recovered from the old plant of a value of Rs. 2,40,000 has been used in the construction of the new plant. The old plant was scrapped and sold for Rs. 7,50,000. The accounts of the company are maintained under the Double Accounts System. Indicate how much would be capitalised and the amount that would be charged to revenue. Show the ledger accounts.Explanation / Answer
HUL Company Limited
Plant Account
Dr. Cr.
Rs. Rs.
To Balance b/d 24,00,000 By Balance c/d 49,20,000
To Bank A/c 22,80,000
(Cost of new plant capitalised)
To Replacement A/c 2,40,000
(old parts)
49,20,000 49,20,000
Replacement Account
Rs. Rs.
To Bank A/c 37,20,000 By Bank A/c 7,50,000
(Current cost of (Sale of scrap)
replacement) By Plant A/c
(old material used) 2,40,000
By Revenue A/c 27,30,000
(Transfer)
37,20,000 37,20,000
Working Note :
Cost to be incurred for replacement of present plant
Cost of Existing Increase Current cost
Plant
Rs. % Rs.
Materials 12,00,000 40% 16,80,000
Labour 7,20,000 80% 12,96,000
29,76,000
Overheads (1/4 of above or 1/5 of total) 7,44,000
Current replacement cost 37,20,000
Current replacement cost 37,20,000
Total cash cost 60,00,000
Amount capitalised, excluding old materials used 22,80,000
References
The Electricity (Supply) Act, 1948
The Indian Electricity Rules, 1956
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