Question

Meaning of replacing fixed asset ?!

There are two types of replacing fixed asset: (fixed asset usage)(fixed asset life) explain each of them ?! with giving suitable examples

Also, must be provided justification and rationale for replacement

Answer 1

Concept of replacing fixed asset arises once an asset needs repair or improvement. At this point of time, there's judgement required whether the cost of repairing/improving the asset is higher than current book value of the asset or not. If the cost of repair/improvement is higher, it's better to replace the asset.

Examples for fixed asset usage are as follows:

1. Installation & upgrade of floor covering such as carpeting, tiles, paneling or parquet.
2. Interior renovation such as lighting, structural beams, casings, baseboards etc.
3. Installation of plumbing & electric wiring

Examples of fixed asset usage are as follows:

1. Leased assets for fixed lease life
2. Erection & recommissioning of heavy equipment

Compare the estimated cost of repair with current book value of asset

If estimated cost of repair > current book value, replace the asset.