Question

Question 3                                                                                                      [10 marks]

You are Chief Financial Officer for Alpha Resorts. You are reviewing the following transactions:

1. Adding a new patio deck to the resort’s upscale restaurant, R180, 000

2. Painting the ocean side beach houses, R75, 000

3. Purchasing additional golf carts, R25, 000

4. Rebuilding the engine in the resort’s airport shuttle bus, R10, 000

5. Replacing the old air conditioning unit in the golf shop with a more efficient one, R20, 000

Your accountant has capitalized all of these items and intends to depreciate them over the appropriate asset’s remaining useful life as originally estimated.

Indicate whether you agree or disagree with your accountant’s treatment of each item. In those cases where you disagree, state the proper treatment of that expenditure. Use the following table:

Ependiture    Agree/ Disagree    Proper Treatment, if Disagree

1. Ading a new potio deck to the resort`s ocean side bar, R180,000

2. Painting 10 ocean front beach houses, R75,000

3. Purchasing additional golf carts for the club house, R25,000

4. Rebuilding the engine in the resort`s airport shuttle bus, R10,000

5. Replacing the pro shop`s old air conditioning unit in the golf shop with a more effecient one, R20,000

Answer 1

Capitalisation should be done only when it is a fixed asset or an addition to already existing fixed asset which enhances its production capacity or useful life.

Maintenance of fixed assets cannot be capitalised.

Expenditure	Agree/Disagree	Proper Treatment
Ading a new potio deck to the resort`s ocean side bar, R180,000	Agree	Since it is new potio deck it should be capitalised
Painting 10 ocean front beach houses, R75,000	Disagree	Since it is a maintenance expenditure for house it should be expensed but not capitalised.
Purchasing additional golf carts for the club house, R25,000	Agree	Golf cart are assets of resorts and so they should be capitalised
Rebuilding the engine in the resort`s airport shuttle bus, R10,000	Disagree	Repairs to engine of a bus does not improve its own capacity. So it should not be capitalised.
Replacing the pro shop`s old air conditioning unit in the golf shop with a more effecient one, R20,000	Agree	It is as good as purchasing a new air conditioner. So it should be capitalised.