Question

Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years. For each of the following items, indicate whether the expenditure should be capitalized or expensed in the period incurred. Items (a) Improvement. select between capitalized or expensed Capitalized (b) Replacement of a minor broken part on a machine. select between capitalized or expensed Expensed (c) Expenditure that increases the useful life of an existing asset.

Answer 1

Answer:

Indicating whether the expenditure should be capitalized or expensed in the period incurred:

a. Improvement = capitalized

b. Replacement of a minor broken part on a machine = expensed

c. Expenditure that increases the useful life of an existing asset = capitalized.

Explanation:

The expectation of costs producing an economic benefit beyond the current year or within the normal course of an operating cycle determines whether to capitalize or expense the costs.  When an item of expenditure is capitalized, it means that the expense recognition is delayed.  When the cost is expensed, it is treated as an expense in the income statement, whereas a capitalized cost is taken to the balance sheet, with only the depreciation expense portion recognized as expense for the period.