To record such costs on replacing damaged machinery covered by insurance, the following should be considered:
The carrying value of the damaged machinery should be written off as a loss if it cannot be sold. However, if the machinery can be sold, an allowance for impairment loss should be made to bring down the damaged machinery to its saleable value.
For the newly purchased machinery, it should be recorded at the acquisition cost.
Meanwhile, insurance claims or compensation for the damaged property, plant and equipment should be recorded as income when it is virtually certain that such compensation will be received; for example, when there is a letter from the insurer confirming the amount of compensation or claims.
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