Question

A special repair to a machine will extend the life of the machine an additional four years beyond the original estimated life of 5 years. The $75,000 cost of this repair is: A. a revenue expenditure B. an ordinary repair and maintenance expenditure C. a capital expenditure. D. either (A) or (B).

Answer 1

Answer:

C. A capital expenditure.

Explanation:

This is an example of a capital expenditure as it makes significant improvements to the machines and extends the life considerably.

These types of expenses are capitalized in the balance sheets under the original asset name and the asset is revalued by the improvement cost and stated at net book value + improvement.

Revised depreciation is then calculated on this new NBV as applicable with increased life of asset.

Hope that helps.