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37 p a g e improvements or betterments improvements

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37 |P a g e
Improvements or bettermentsImprovements or betterments are modifications or alternations which increase theservice life or the capacity of the asset.Improvements may represent replacement of an asset or part thereof with one of abetter or superior quality. Such expenditures are normally capitalized. Theimprovements that do not involve replacement of parts are simply added to thecost of the existing asset. Examples of improvements are:a.A tile roof is substituted for wooden shinglesb.A shatter proof glass is substituted for ordinary glassc.An old motor in a machine is replaced by a new and powerful oned.Galvanized iron roofing is substituted for nipa roofinge.Replacement of wooden floor by concrete flooringReplacementsReplacements also involve substitution but the new asset is not better than the oldasset when acquired.The basic difference between an improvement and replacement is that animprovement is a substitution of a better or superior quality whereas areplacement is a substitution of an equal or lesser quality.Replacements may be classified into three:a.Replacement of the old asset by a new one. This is the replacementcontemplated.For example, an old truck is replaced by a new one. This replacement is surelycapitalizable as a new asset.b.Replacement of major parts or extraordinary repairsc.Replacement of minor parts or ordinary repairsRepairsRepairs are those expenditures used to restore assets to good operating conditionupon their breakdown or replacement of broken parts.Repairs may be classified as extraordinary repairs and ordinary repairs.Extraordinary repairs are material replacement of parts, involving large sums andnormally extend the useful life of the asset. Extraordinary repairs are usuallycapitalized.Ordinary repairs are minor replacement of parts, involving small sums and arefrequently encountered.Ordinary repairs are normally charged to expense when incurred.Accordingly, an entity does not include in the carrying amount of property, plantand equipment the cost of day-to-day servicingof the property.Rather, such cost of day-to-day servicing isrecognized as expense when incurred.Repair and maintenanceRepair is different from maintenance in thatrepair restores the asset in good operatingcondition while maintenance keeps the asset ingood condition.Thus, repair is restorative or curative whilemaintenance is preventive.The theoretical distinction is difficult to maintain in practice. Hence the combinedin a single account “repair and maintenance."Rearrangement costRearrangement cost is the relocation or redeployment of an existing property,plant and equipment.38 |P a g e
PAS 16, paragraph 20, provides that recognition of costs in the carrying amount ofproperty, plant and equipment ceases when the asset is in the location andcondition for the intended use.

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Term
Summer
Professor
SHIRLEY BAYONETA
Tags
Depreciation, Generally Accepted Accounting Principles

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