Exercise 10-21 - followed One approach is to capitalize the...

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EXERCISE 10-21 (20–25 minutes) (a) Any addition to plant assets is capitalized because a new asset has been created. This addition increases the service potential of the plant. (b) Expenditures that do not increase the service benefits of the asset are expensed. Painting costs are considered ordinary repairs because they maintain the existing condition of the asset or restore it to normal operating efficiency. (c) The approach to follow is to remove the old book value of the roof and substitute the cost of the new roof. It is assumed that the expenditure increases the future service potential of the asset. (d) Conceptually, the book value of the old electrical system should be removed. However, practically it is often difficult if not impossible to determine this amount. In this case, one of two approaches is
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Unformatted text preview: followed. One approach is to capitalize the replacement on the theory that sufficient depreciation was taken on the old system to reduce the carrying amount to almost zero. A second approach is to debit accumulated depreciation on the theory that the replacement extends the useful life of the asset and thereby recaptures some or all of the past depreciation. In our present situation, the problem specifically states that the useful life is not extended and therefore debiting Accumulated Depreciation is inappropriate. Thus, this expenditure should be added to the cost of the plant facility. (e) See discussion in (d) above. In this case, because the useful life of the asset has increased, a debit to Accumulated Depreciation would appear to be the most appropriate....
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