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why Is the early settle discount not capitalised in the total cost of the asset?
(question reference from acca technical artical SOLUTION on IAS16 PPNE example 1)
link to the problem https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/ppe.htmlThe early settlemt discount will be shown as “other income” within the statement of profit or loss?
Ask yourself this “How much cash was actually paid?”
$82,000 less the 10% trade discount brings the asset cost down to $73,800.
Now, if we pay early, we can get an additional 5% discount. But if we don’t choose to take advantage of that additional discount then the cost of the asset is $73,800
That additional 5% or $3,690 is like a reverse interest expense – it’s an income received because of our own internal policy of taking advantage of early settlement discounts. It’s not, therefore, a reduction in the accounting cost of the item of plant
Does that make it clearer for you?
Your post asked why the early settlement discount was not capitalised. Well, in fact, it IS! The $3,690 is NOT deducted in arriving at the amount to be capitalised and, therefore, it IS included within the final amount
Ok?
Sir, Thank you so much for the fast and illustrative response.
so sir all you meant to say that is the early settlement discount is not actually the reduction in the purchase price of the machine but it is rather a incomed gained during the purchase process which has to be recorded as income in income statement and written off in the same year??
and that is the accounting entry is made as soon as the assets is purchased irrespective of early settlementment discount??
No, at the point of taking advantage of the early settlement discount, the double entry will be Dr TNCA Cr Cash with the reduced amount
But that leaves the asset at an undervalue, so we need to record also the early settlement discount as Dr TNCA Cr Discount Received / Other Income
Ok?
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