11.4 You, an engineer, and an attorney friend, Rob, started a small business 3 y

Question

11.4 You, an engineer, and an attorney friend, Rob, started a small business 3 years ago to do energy audits for small businesses. A piece of equipment that costs S25,000 then has become prematurely obsolete and needs to be replaced with a solid state version that has a purchase price of $20,000 and the current equipment has a nil salvage value. Your company ac countant shows the book value of the equipment to be $10,000. (a) If you buy the solid state equipment, how should the difference between the cost of the new equipment and the value of the old equipment be considered? (b) Your partner thinks of this difference as an added cost to the new equipment, effectively making its purchase price $30,00, Is she coret

Explanation / Answer

(a) If we buy soild state equipment in the replacement of old equipment which has been obsolete than solid state equipmet should be capitalised fully i.e. with the amount of $20,000 and the book value of old equipment since it has become obsolete should be charged to profit & Loss account fully i.e. $10,000 (b) She is wrong, The book value of old obsolete equipment should be charged to profit & Loss account,so effective purchase price will remain $20,000

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