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Capitalize or Expense out?
03-07-2011, 02:06 PM
Post: #1
Capitalize or Expense out?
A laptop costs Rs 50,000. After few months of its purchase its LCD gets damaged and the replacement of LCD costs Rs 20,000.


Should we expense out or capitalize the new LCD?
If we capiatalize what should we do with the cost of old LCD as the laptop has been capitalized as a whole previously.
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03-07-2011, 02:44 PM
Post: #2
 
IN my opinion, its revenue expense and may be expensed out. The replacement of this item neither increases the life of asset nor add value.
However, it is pertinent to find out the reason for damages.
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03-16-2011, 02:27 AM
Post: #3
 
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by human</i>
<br />A laptop costs Rs 50,000. After few months of its purchase its LCD gets damaged and the replacement of LCD costs Rs 20,000.


Should we expense out or capitalize the new LCD?
If we capiatalize what should we do with the cost of old LCD as the laptop has been capitalized as a whole previously.


<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Dear human
i think it is to be capitalised... the New LCD definitely have added to the value of laptop... e.g., if after damage of LCD, value of laptop will have, suppose Rs. 25000... after additions (New LCD), its value will certainly increase... its common!
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03-17-2011, 09:07 PM
Post: #4
 
it will be revenue expenditure coz the the LCD has broken by conduct of the user..
it can not be treated as compulsory payment like TAX, Import Duty etc..

other side of coin is, if the price of new LCD exceeds its previous one the exceed amount will be treated as capital expenditure coz it can be recoverable by resell the Laptop.

Any query must reply.
Regards,
M.Farooq Rehmani.
(CA-inter)
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04-12-2011, 03:19 AM
Post: #5
 
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by Farooq.authorities</i>
<br />it will be revenue expenditure coz the the LCD has broken by conduct of the user..
it can not be treated as compulsory payment like TAX, Import Duty etc..

other side of coin is, if the price of new LCD exceeds its previous one the exceed amount will be treated as capital expenditure coz it can be recoverable by resell the Laptop.

Any query must reply.
Regards,


M.Farooq Rehmani.
(CA-inter)
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">


salam.

well my point of view is

1 the cost of old LCD should be treated as LOSS (abnormal loss) and should be expensed out in current PLS account..

2 the cost of new LCD adds to the value of the Laptop! isn't it?
so if it adds value to the Laptop, we should capitalized it provided that Laptop is used as Fixed Asset!!

any further discussion will be appreciated.

Regards.
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04-13-2011, 08:50 PM
Post: #6
 
Well we will not capitalize LCD as it has already been capitalized with the cost of Laptop,
Loss can be recognised if Cost of original LCD is available, however in my point of view that is not available, so we will not capitalize.
Moreover materiality concept should also be brought in.
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04-14-2011, 12:37 AM
Post: #7
 
The very basic question is Does the laptop bring about inflow of economic benefits to the company?
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04-14-2011, 01:58 AM
Post: #8
 
Even if it does than too the laptop has been capitalized it is not a case of intangible asset. In my best understanding it is a revenue expenditure bcoz the replacement of the LCD has not brought any benefit to the laptop that was not present when the old LCD was in place. Neither it is an overhauling which would have resulted in an increased life of asset. As far as i understand the framework this is a expense which needs to be shown in SOCI as maintenance cost.
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04-14-2011, 02:51 AM
Post: #9
 
LCD cost will only be capitalised if the laptop is capitalised initially. The recognition of laptop as an asset depends on the nature of the business whether it brings economic benefits to the business.
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04-14-2011, 03:01 AM
Post: #10
 
Dont you think that intital capitalization cost of laptop has already incorporated the value of LCD in its capitalized amount.
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04-14-2011, 03:09 AM
Post: #11
 
For example if the laptop is capitalized at 50000 and we add another 20000 for LCD than the total will be 70000 for that laptop. but the cost of laptop in market is 50000 which includes LCD.
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04-14-2011, 05:34 AM
Post: #12
 
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica, san" id="quote">quote<hr height="1" noshade id="quote"><i>Originally posted by basit_namdar</i>
<br />For example if the laptop is capitalized at 50000 and we add another 20000 for LCD than the total will be 70000 for that laptop. but the cost of laptop in market is 50000 which includes LCD.
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salam 2 all.
well i think that we will have to make an adjustment
(i suppose that the Co. recognized the laptop as an asset which will obviously bring capital inflows to the entity) in the laptop account...

like the entry for loss will be

loss from .............. 20000 Dr.
laptop 20000 Cr.

loss will be included in PLS A/C and laptop cost will be reduced by the amount of loss

then we will incorporate the price of new LCD in the A/c of laptop (which will bring the price of laptop to the FMV) and will depr. that according to IAS-16!

well this is my understanding...

love to discuss this further...

and DARD, u plz discuss this topic with us. very educational for us.

Regards.
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04-14-2011, 08:22 PM
Post: #13
 
Paragraph 12, 13 and 14 of IAS-16 deal with the subsequent costs incurred on an item of PPE. Paragraph 13 interalia states

QUOTE

Under the recognition principle in paragraph 7, an entity recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs 67–72).

UNQUOTE

Given the materiality of the LCD replacement value compared to total Laptop cost, it can be capitalized considering that without such a replacement laptop was not even capable for usage; BUT for doing so, the condition is to DERECOGNIZE the replaced broken LCD. Without derecognizing the broken LCD the new one cannot be capitalized.

If the carrying amount of broken LCD is not available, then such an adjustment would be “impracticable” and the only solution will be to expense out the cost of new LCD as a repair and maintenance expense. What “impracticable” means has been defined in paragraph 7 of IAS-1 as -,

“Applying a requirement is impracticable when the entity cannot
apply it after making every reasonable effort to do so.”

Presumably it was the first year of laptop’s operation, therefore, expensing out of the LCD will not leave any material distorting impact on the results of the entity as well.

Regards,
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