Question No. 2Haleeb Foods, a renowned name in dairy farming industry in Pakistan has incurred the following expenditure during the current year. You are required to identify how these costs should be treated in the financial statements of Haleeb Foods according to IAS-38?
Part (a) Rs.175, 000 spent on the design of a new product and it is assumed that this new design will require the next three years period to be developed and ready for tested with a view to production in four years' time. Answer: According to IAS38, costs spend on the design are development cost; we will capitalize these costs and will right off against sale in the profit and loss account. After deducting cost from sale, we gets gross profit from which further we deduct other expenses and taxes and gets net profit or net loss.
Part (b) Rs.650, 000 incurred on the testing of a new production system which designed by the company itself and start to operate during the following accounting period. By using this new system it is predicted that there will be a cut off in cost of production by 20%.
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