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P2-D2.
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7fsa
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Dear Chris,
How are you?
I hope you are doing well,
it’s mentioned in Kaplan textbook and in your nice lecture you said dismantling costs should be capitalized to the assets using present value regarding this matter i have a question its mentioned in kaplan the the following data the asset costs $10 Million and would cost $4 Million to remove in 20 years , then the present value of this dismantling cost must be calculated if the interest rate is 5% and he calculated the dismantling costs which equals to $1507558 and added it to the cost of asset which is $10 Million and capitalized the total amount to the asset to become its value =$10000000+$1507558 my question is why did he capitalized just $1507558? and why don’t we capitalize the total amount of $4000000 of dismantling costs and we can get expenses for any increase in finance cost over the 20 years.
P2-D2
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Hi,
It is capitalised at present value as that is the amount that would be paid in today’s prices, to reflect the time value of money. The asset is then depreciated over its useful life and then the provision set up of $1,507,558 is then unwound (increased) each year at 5%. The increase is treated as a finance cost through profit or loss.
Thanks.
7fsa
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