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Can you please help me understand this: “replacement parts should be capitalised, provided the original cost of the items they replace is derecognised at the time time of the replacement? Also, what is the journal entry??
Thank you so much!!
Hi,
I don’t think you see this much in an exam but effectively if you have an item of PPE with multiple component parts and then say one of these parts is replaced because the original part is defective/broken then the new part is capitalised but when doing so the old part needs to be removed from the cost.
So, say we have an aircraft where an engine with a carrying value of $200k needs to be replaced with a new engine costing $500k. We remove the $200k old engine from the total carrying value of the aircraft and replace it with the new one at $500k.
Thanks
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