Accounting treatment for insurance claims on condemned assets

Question

One of our factories went under water due to floods and one machine was fully damaged beyond repair. Our insurance company agreed to replace the machine with a new one. The cost of the machine was $10000 (NBV is 8000 based on 10% depreciation after 02 years). The new machine cost borne by insurance company was $11000.

How should I account for this incident? Can I take 11000 as income? what are the entries to be passed?

Answer 1

In such a scenerio, IAS-16 requires that insurance claims has to set off against de recognition of assets and any amount above/lower than book value  of asset is recognized as income/expense. In your case following entries will be passed:

On acceptance of claim by insurer:

Dr. Insurance receivable        11000

Dr. accumulated depreciation 2000

Cr. Asset                                 10000

Cr. Other income.                    3000

On receipt of asset:

Dr. Asset                              11000

Cr. Insurance receivables    11000