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Chapter 10: Q13BE. (page 532)

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life

Short Answer

Expert verified

In the given case, transaction (c) should be expensed.

Step by step solution

01

$13,000 paid to rearrange and reinstall machinery

In this given case, the $13,000 paid-for rearrange and reinstallation should be capitalized as the original installation cost and depreciation to date has not been known.

02

$200,000 paid-ford for addition to building

This is the addition to a present asset. Thus it should be capitalized and not expensed.

03

$200 paid for tune-up and oil change on delivery truck

This is the period expense for improving current performance. So this amount should be expensed and not capitalized.

04

$7,000 paid to replace a wooden floor with a concrete floor

In the given case, a wooden floor has been replaced with a concrete floor. So this is an improvement. This can be capitalized based on the assumption that the amount can be reduced to zero by depreciation.

05

$2,000 paid for a major overhaul on a truck, which extends the useful life

In the given case, repair has extended the useful life of the asset, so it would be capitalized and not expensed.

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Most popular questions from this chapter

Neville Enterprises has a number of fully depreciated assets that are still being used in the main operations of the business. Because the assets are fully depreciated, the president of the company decides not to show them on the balance sheet or disclose this information in the notes. Evaluate this procedure

Question: Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use: (a) It should be excluded completely. (b) It should be included at the same rate as is charged to normal operations.

What are the circumstances or rationale that support or deny the application of these methods?

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.

(Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter

\(15,800

Cash paid

10,000

Cost of old melter (5-year life, \)700 salvage value)

11,200

Accumulated depreciation鈥攐ld melter (straight-line)

6,300

Secondhand fair value of old melter

5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange

  1. has commercial substance, and
  2. lacks commercial substance. Cannondale鈥檚 fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

(Nonmonetary Exchanges) You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Client A

Client B

Original cost

\(100,000

\)150,000

Accumulated depreciation

40,000

80,000

Fair value

80,000

100,000

Cash received (paid)

(20,000)

20,000

Instructions

  1. Record the trade-in on Client A鈥檚 books assuming the exchange has commercial substance.
  2. Record the trade-in on Client A鈥檚 books assuming the exchange lacks commercial substance.
  3. Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
  4. Record the entry on Client B鈥檚 books assuming the exchange has commercial substance.
  5. Record the entry on Client B鈥檚 books assuming the exchange lacks commercial substance.
  6. Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
See all solutions

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