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. Expenditure Agree/ Disagree Proper treatment,If Disagree 1. Adding a new patio 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 with a more efficient one, R20,000

Answer 1

Expenditure Agree/ Disagree Proper treatment, If Disagree

1. Adding a new patio deck to the resort’s ocean side bar, R180,000?

Ans: Building a Deck, Installing a Hot water Heater or Installing Kitchen Cabinets are all Capital Improvements which will be Capitalized & Depreciated over Useful Life.

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

Ans: Repainting of Exterior of the Building is Generally a Current Deductible Repair Expense because Painting isn’t an Improvement Under the Capitalization Rules. This Should be Charged as Expense when Incurred.

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

Ans: Purchase of Golf Carts is an Capital Expenditure and it can be depreciated over the useful life of the asset.

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

Ans: Rebuilding the Engine of the Airport Shuttle Bus increases the useful life of the asset which means it can be capitalized and depreciated over the useful life of the asset.

5. Replacing the pro shop’s old air conditioning unit with a more efficient one, R20,000?

Ans: Replacing also comes under the capital expenditure and can be depreciated over the useful life.