Question

Many years after constructing a plant asset, management spent a significant sum on the asset. Which of the following types of expenditures should be capitalized in this instance:
(1) an expenditure for routine maintenance that increases the useful life compared with deferring the maintenance,

(2) an expenditure that increases the useful life of the asset compared with the original estimate assuming normal maintenance at the required intervals,

(3) an expenditure that increases the utility of the asset.

(1) (2) (3)
Yes

Yes

Yes

No

Yes

Yes

No

No

Yes

No

Yes

No

Answer 1

Answer:

(1) NO As this maintenaince will be done in order to keep the current value It is an expenditure to avoid decay of the plant assets

(2) Yes it should be capitalizeds as increase the useful life of the assets (thus the depreciation will change as well as the useful years remaining increases

(3) Yes it should be. As increase the utility it will have a higher future positive cashflow in the future.

Explanation:

We are asked under which circumnstances the amont spend in the maintenance or overhaul should increase the plant asset account or be considered expense of the period.

Answer 2

Answer:

1st one is no. Maintenance expenses do not add any value to the asset and the useful life does not change because of such improvements. Moreover, this has no impact on the depreciation too.

2nd one is yes. It should be capitalised as it directly increases the useful life time of the asset. This suggest that the improvement also changes the productivity of the asset and has an impact on the depreciation as well.

3rd one is Yes as well. When the "utility" of an asset is increased, this suggest that it's ability to generate future cash flows has also increased as well. Because of that, the expenditure must be capitalised and the useful life and the depreciation has to be adjusted accordingly as necessary.

Explanation: