Question

In: Accounting

Sellers Construction Company purchased a compressor for $105,300 cash. It had an estimated useful life of...

Sellers Construction Company purchased a compressor for $105,300 cash. It had an estimated useful life of four years and a $10,800 salvage value. At the beginning of the third year of use, the company spent an additional $9,260 related to the equipment. The company’s financial condition just prior to this expenditure is shown in the following statements model:

Assets = Equity Rev. − Exp. = Net Inc. Cash Flow
Cash + Book Value of Compressor = Com. Stk. + Ret. Earn.
10,070 + 58,050 = 25,600 + 42,520 NA − NA = NA NA


Required
Record the $9,260 expenditure in the statements model under each of the following independent assumptions: (In the Cash Flow column, use the initials "OA" for operating activities, "FA" for financing activities, "IA" for investing activity and "NA" for no affect. Enter any decreases to account balances with a minus sign.)

a. The expenditure was for routine maintenance.
b. The expenditure extended the compressor’s life.
c. The expenditure improved the compressor’s operating capacity.

Solutions

Expert Solution

a. The expenditure was for routine maintenance.
Assets = Equity Revenue - Expenses = Net Income Cash flow
Cash + Book value of compressor = Common stock + Retained earnings
$10,070 $58,050 $25,600 $42,250 NA - NA = NA NA
-$9,260 -$9,260 $9,260 -$9,260 OA
The expenditure incurred was routine maintenance expense which does not add value to the compressor and therefore in this case it is expensed in the income statement
b. The expenditure extended the compressor’s life.
Assets = Equity Revenue - Expenses = Net Income Cash flow
Cash + Book value of compressor = Common stock + Retained earnings
$10,070 $58,050 $25,600 $42,250 NA - NA = NA NA
-$9,260 $9,260 $0 IA
The expenditure incurred increases the life of the compressor and therefore is a capital expenditure and should be capitalized by increasing the value of compressor.
c. The expenditure improved the compressor’s operating capacity.
Assets = Equity Revenue - Expenses = Net Income Cash flow
Cash + Book value of compressor = Common stock + Retained earnings
$10,070 $58,050 $25,600 $42,250 NA - NA = NA NA
-$9,260 $9,260 $0 IA
The expenditure incurred improves the operating capacity of the compressor which means the company can produce more product and increase sales and therefore is a capital expenditure which should be capitalized.

ekkarill92 answered 3 months ago
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