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Hello, I have some other questions regarding a situation
1.In a situation where Co. A takes a loan from a bank to buy a motor vehicle for $115,000 of which $15,000 of that amount is VAT. What would the double entry be? (more specifically wrt the fixed asset cost amount)
2.In paying back the loan, if we were to recalculate it, would the interest be calculated on the total amount borrowed of $115,000 or just the $100,000?
3.How would the answers in the first 2 question be affected if the company purchasing the vehicle is (a) VAT registered (b) not VAT registered?
1) My little knowledge of taxation in general and vat in particular is that vat on motor vehicles is not reclaim able as input tax (unless it is a commercial vehicle such as a van or taxi)
Double entry would therefore include within the cost of the asset the irrecoverable purchase tax figure of $15,000 (Dr Motor Vehicles $115,000 Cr Loan)
2) How much did you borrow? So what is the base figure for the calculation of interest? $115,000!
3) no change whether it’s vat registered or not
Hello Mike, I’m having a bit of a debate with my colleagues. The situation is this….if a plant or a factory uses fuel A to run all the equipment and it is in short supply the plant would not be operating at full capacity, as such the future cash flows would decrease which I agree affects the value in use and in turn impairment. On the other hand, I’m thinking the economic benefit of the plant has decreased but it is not because of the plant itself not working properly. If for example, that same plant and equipment were to be sold to another country where the fuel is abundant then it would work fine and therefore be subjected to the normal depreciation. My question to you therefore is, should the plant be impaired?
Is carrying value lower than recoverable amount? If so, no impairment
In the context of recoverable amount – which is higher, value in use or net selling price? The way you have set up the question, it suggests that selling price is higher than value in use (I presume that, were you to sell the plant overseas, transportation costs would be covered by the value received)
So just because value in use would fall because of restrictions on production levels, net selling price would not necessarily be similarly affected. The comparison for impairment therefore becomes carrying value compared with net selling price
Is carrying value greater than selling price?
Hope that helps
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