Model: Estimated cost of replacement adjustments An electricity company in Himachal Pradesh decides to replace one of its old plants with a modern one with a larger capacity. The plant was installed in 1948 at the cost to the company of Rs.90,00,000, the components of materials, labour and overhead being in the ratio of 4:3:3.
It is ascertained that the cost of materials and labour have gone up by 50% and 80%, respectively. The proportion of overheads to total costs is expected to remain the same as before.
The cost of the new plant as per improved design is Rs.2,00,00,000 and in addition, materials recovered from the old plant was of the value of Rs.10,00,000, have been used in the construction of the new plant. The old plant was scrapped and sold for Rs.20,00,000.
The accounts of the company are maintained under double account system. Indicate how much would be capitalized and the amount that would be changed to revenue. Show journal entries and prepare necessary ledger accounts.