Replacement cost

[Acid]

Hi

What is the Replacement cost ? Can I find about it in F7 GTG Study text ?

Thanks

Assad

[Geetanjali]

Hi Asaad,

How are your studies going on?

Hope not too difficult....

As per your query (apologies in the delayed reply),


Under replacement cost:

Assets are recorded at the cash value or the value of another consideration required to acquire the same or similar asset currently.


Liabilities are recorded at the amount required to settle the same or similar obligations currently.


The concept has been explained in SG B2 of paper F3 GTG study text.

Hope this helps,

Regards
Geetanjali

[Acid]

HI

Thank you for your reply! Studies are going at a cloudy stage .... Regarding Replacement cost do we subtract the Deprication charge too?

[Vandana]

Hi acid,

can you give me an example? Generally you can have depreciated replacement cost, to get an idea of how much your asset is worth in today's terms.

Let me know if this helps

[Acid]

Hi,

An example can be If a company owns a machine which it purchased four years ago for $100,000. The accumulated deprication on the machine to date is $40000 . The machine could be sold to another manufacturer for $ 50000 . To replace the machine with a new version would cos $110,000.

How would we take the Replacement cost of this machinery?


Thanks

Assad

[Vandana]

Hi Acid,

apologies for the delayed response. There are a number of answers to your question, but I have outlined the most common approach. you asked:

An example can be If a company owns a machine which it purchased four years ago for $100,000. The accumulated deprication on the machine to date is $40000 . The machine could be sold to another manufacturer for $ 50000 . To replace the machine with a new version would cos $110,000.

How would we take the Replacement cost of this machinery?

>> The replacement cost would be the price of buying a similar asset today i.e. $110,000

>> depreciated replacement cost would be the cost above ($110,000) less any physical deterioration to date. You could argue therefore that you could depreciate this for 4 years too (as your original asset of $100,000 has depn of 40,000 i.e. 4 out of 10 years) to get the depreciated replacement cost of £110000 - (4 x 11,000) = $66,000

Hope this makes sense!

[Acid]

Thanks ! This is exactly what I was looking for . However its weird that we have to deprciate the amount but anyways thats how we have to do it.


Thank you !
http://mail.yimg.com/us.yimg.com/i/mesg/tsmileys2/40.gif



Acid

[Vandana]

ahhhhhh, I have never been givem a cyber flower before. thanks!!!

[Acid]

Hi

Re the above query , Do we always use depreciated replacement cost or can we use a depreciated cost without putting on depriciation?


Thanks

Acid

[Vandana]

Actually, a lot of the time, people just compare NBV to replacement cost, without considering the depreciation.