Question

Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years. For each of the following items, indicate whether the expenditure should be capitalized or expensed in the period incurred. Items (a) Improvement. (b) Replacement of a minor broken part on a machine. (c) Expenditure that increases the useful life of an existing asset. (d) Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value. (e) Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value. (f) Expenditure that increases the quality of the output of the productive asset. (g) Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life. (h) Ordinary repairs.

Answer 1

Explanation:

For each of the following items, indicating whether the expenditure should be capitalised or expenses in the period incurred :

(a) Capitalised Improvement

(b) Expenses Replacement of a minor broken part on a machine

(c) Capitalised Expenditure that increases the useful life of an existing asset

(d) Capitalised Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.

(e) Capitalised Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.

(f) Capitalised Expenditure that increases the quality of the output of the productive asset.

(g) Capitalised Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life

(h) Expenses Ordinary repairs.