Effect of any Addition or Extension to Existing Asset
Sometimes an existing asset does not function to its full capacity because it requires some additional asset to deliver the best results. Such additions or extensions are made for rendering the existing assets suitable for the business operations. These modifications either become an integral part of the already existing asset or treated like a completely different set of assets.
However, these additional assets are also subject to depreciation over the useful life of the asset. The depreciation effect of any addition or extension to the existing asset depends on whether the new asset is capitalised with the existing one or accounted as a new asset.
The addition or extension to the existing asset is capitalised only if it does not form part of the regular repair and maintenance expenses that are incurred usually on the asset.
AS-6 (Revised) mentions the treatment for effect of any addition or extension to the existing asset.
- When any addition or extension that is made to the existing asset becomes an integral part of the original asset, it should also be depreciated in the same way the existing asset is depreciated, i.e., over the useful life of that asset.
- If the new asset is combined with the existing asset, then the rate of depreciation that is applied to it may also be provided to the addition or extension made.
- Sometimes, the additions made hold a separate identity than that of the existing asset, i.e., they cannot be merged with the original asset as they are capable of being used even after the existing asset is disposed off. In such a case, depreciation should be charged independently keeping the useful life of the new asset as the basis and not as per the life of the existing asset.
For Example –
M/s X bought a machine for Rs. 10,00,000 on April 01, 2017. Depreciation was provided on a straight-line basis at the rate of 20% on original cost. On April 01, 2019 a major addition was made in the machine to make it more efficient at a cost of Rs. 100,000. This amount is to be depreciated @ 20% on a straight line basis. Routine maintenance expenses during the year 2017-18 were Rs. 2,000. Calculate depreciation amount and charge to profit and loss account in respect of the accounting year ended on March 31, 2020.
Solution –
1. Cost of modification i.r. Rs. 10,00,000 should be capitalised as it forms an integral part of the asset whereas the routine repair expenses of Rs. 2,000 should be charged to Profit and Loss account as they are in the nature of revenue expenditure.
2. Calculation of balance of provision for depreciation account on 01.04.2018.
Original Cost on 01.04.2017 = 10,00,000
Depreciation for the years 2017-18 and 2018-19 = 4,00,000
(@ 20% of 10,00,000 )
3. Depreciation for the year 2019-20 is calculated as under:
20% of 10,00,000 = 2,00,000
20% of 1,00,000 = 20,000
Total Depreciation for 2019-20 = Rs. 2,20,000
4. Amount that should be charged to profit and loss account
Depreciation Rs. 2,20,000
Repair and maintenance Rs. 2,000
Thus AS-6 specifies the treatment for any modification in the assets so existing. Whether they should be capitalised with the original asset or booked as a new asset altogether. In either case, what should be the rate of depreciation and useful life is also clarified.
Chapter 7 – Depreciation, Provisions and Reserves – CBSE Class 11 Accountancy
- Depreciation and other Similar Terms
- Causes of Depreciation
- Need for Depreciation
- Factors Affecting the Amount of Depreciation
- Methods of Calculating Depreciation Amount
- Comparative Analysis
- Methods of Recording Depreciation
- Disposal of Asset
- Effect of any Addition or Extension to the Existing Asset
- Provisions
- Reserves