You are a corporate accountant for a distribution company that provides distribution services to a large online retailer.

You are a corporate accountant for a distribution company that provides distribution services to a large online retailer. Your company extensively uses conveyor belts to move shipping boxes and their contents through its warehouse. The seams in the company's conveyor belts have started to jam periodically at times bringing the belts to a stop. The company has invested $ 100,000 to apply a special bonding agent to the belt's seams so they won't jam anymore. By applying this bonding agent, the company can avoid replacing the belts to fix this jamming issue. There is a chance that this bonding agent will also recruit in the belts' useful lives being extended by a few years. Assume that a plant accountant has contacted you to ask whether the bonding agent should be recorded as an asset or as an expense. Using guidance from the conceptual Framework, analyze this issue and prepare an email response to the plant accountant.

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Expert Solution

According to AASB 116 an expenses are recorded as assets when it is probable that the future economic benefits associated with the item will flow to the entity, and the cost of the item can be measured reliably. There are also have some threshold guidance for capitalization is that physical noncurrent assets or parts of an assets costing more than $5,000 individually should be capitalized.

In the given problem company uses conveyer belts to move shipping boxes and their contents through its warehouse. The seams of belt have started to jam periodically at times bringing belts to stop. Company has invested $100,000 to apply a bonding agent, threshold limit for capitalization have met. The future economical benefits will flow to entity as it will has chance to increased the life of conveyer belt a few years. The cost of bonding agents are easily reliable. Other than that due to applying this bonding agent the company can avoid the replacing the belt that means it has improved the life of the assets. Therefore it should be recorded as assets as it meets all criteria to be treated as assets.

ekkarill92 answered 1 year ago

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