Question

Exercise 7: Expenditures Subsequent to Acquisition – Expense or Asset?

The question is whether to record expenditures on operational assets in use as expenses or assets. The answer depends on whether the expenditure simply maintains the asset (expense) OR produces future benefits (asset).

Future benefits may occur in the following ways:

1. Extend the useful life of the asset beyond its original estimate

2. Increase the operating efficiency of the asset (either makes more units or costs less)

3. Increase the quality of the units produced

Required: For each item below, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.

1. _____ Annual maintenance on its machinery

2. _____ Painting offices

3. _____ Rearrangement of the shipping and receiving area resulting in an increase in productivity

4. _____ Addition of a security system to its manufacturing facility

5. _____ Replacement of minor broken part on a machine

6. _____ Expenditure that increases the useful life of an existing asset

7. _____ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value

8. _____ Expenditure that increases the efficiency and effectiveness of a productive asset and increases its salvage value

9. _____ Ordinary repairs

10. _____ Improvements to a machine that increased its fair value and its production capacity by 30% without extending the machine’s useful life

11. _____ Expenditures that increase the quality of the output of the productive asset

12. _____ Cost of successful defense of a copyright

13. _____ Cost of an unsuccessful defense of a patent

Answer 1

1) Annual maintenance on its machinery needs to be recorded as Expense since no future benefet will occur to the Company.

2) Painting Offices is an Expenses since useful life usually is not more than one year. It is also categorised as normal repairs and maintenance expenses.

3) Rearrangement of the shipping and receiving area resulting in an increase in productivity - Capitalised - Since productivity is increased due to the expenditure.

4) Addition of a security system to its manufacturing facility - Capitalised - Since Security/Information system useful life is more than one year.

5) Replacement of minor broken part on a machine - Expense - Since expenditure is minor and no productivity is increased.

6) Expenditure that increases the useful life of an existing asset - Ccapitalised - Since useful life is increased.

7) Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value - Capitalised - Since efficiency is improved and capitalisation is not depended upon Salvage Value.

8) Expenditure that increases the efficiency and effectiveness of a productive asset and increases its salvage value -: Capitalised - As said above, operating efficiency is improved regardless of any salvage value.

9) Ordinary repairs - Expenses - Since this is normal annual repairs and maintenance.

10) Improvements to a machine that increased its fair value and its production capacity by 30% without extending the machine’s useful life - Capitalised - Since production capacity is improved. However it will be depreciated in remaining useful life of the asset.

11) Expenditures that increase the quality of the output of the productive asset -: Capitalised - Since productivity is improved by way of quality output.

12) Cost of successful defense of a copyright - Capitalised - Accounting principles specifically allows capitalisation.

13) Cost of an unsuccessful defense of a patent - Expense - If the patent can't be defended by the Company then it needs to be charge as an expense.