Question

Northwood Corp, purchased new equipment to be used in its manufacturing plant. The cost of the equipment was $250,000 including $5,000 freight and $12,000 of taxes. In addition to the equipment cost, Northwood paid $10,000 to install the equipment and $7,500 to train its employees to use the equipment. Over the asset's life, Northwood paid $35,000 for repair and maintenance. At the end of five years, Northwood extended the life of the asset by rebuilding the equipment's motors at a cost of $85,000.

What amounts should be capitalized on Northwood's balance sheet and what amounts should be expensed in the period incurred?

Answer 1

The costs which would increase the efficiency and requried for the equipment are capitalized in the balance sheet and other expenses are expensed in the income statement

Calculation of amount to be capitalized in the balance sheet

Purchase price

$250,000

Add: Installation

$10,000

Rebuilding motor

$85,000

Total amount to be capitalized

$345,000

Thus, the amount to be capitalized to the balance sheet is $345,000

Calculation of amount to be expensed in the current period

Training costs of employees

$7,500

Repair and maintenance costs

$35,000

Total amount to be expensed

$42,500

Thus, the amount to be expensed is $42,500

Repairs and maintenance are periodical expense which does not enhance the useful life of the asset and so it is expensed.