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An entity has owned its present facilities since 1981, and the CEO has authorized various expenditures to repair and improve the building during the current year. The building was beginning to sag, and without repair, the building would only last another 8 years. To correct the problem, the foundation was reinforced and several columns were added in the basement area at a cost of $47,200. As a result, engineers estimate that the building will have a remaining useful life of 20 years. To install a new computer local area network (LAN) and be ready for the next generation of computers, the phone lines and electrical systems were updated at a cost of $81,300. The entity’s engineers estimate that these improvements should last 25 years. The offices and open work spaces were rearranged to reduce exposure to electronic emissions at a materials cost of $31,000. The purchase and installation of the computers and software for the LAN cost $102,700. The LAN hardware and software will have to
ﻝﻭﺩ ﻥﻳﺗﺎﻧﻘﻟﺍ ﻰﻠﻋ ﺎﻫﻭﻗﻼﺗﺣ ﺎﻫﻭﺟﺎﺗﺣﺗ ﻲﻠﻟﺍ ﻪﻠﺋﺳﻻﺍﻭ ﺏﺗﻛﻟﺍ ﻝﻛ be replaced in 6 years, but further rearrangement of the offices and work spaces will not be necessary. After the above improvements were completed, the entire building was painted inside and outside at a cost of $9,450. As controller of the entity, which one of the following actions would you recommend to be in conformity with generally accepted accounting principles? A. Treat all expenditures as expenses in the current year except the cost of rearrangement ($31,000), which should be amortized over a period not to exceed 20 years. B. Capitalize all expenditures because they represent additions, improvements, and rearrangements. C. Capitalize all costs with the exception of the upgrade to the phone and electrical systems and the painting because they represent maintenance expenses. D. Capitalize all costs with the exception of the painting because it represents maintenance expense. Answer (D) is correct. Expenditures on capital assets that improve the asset’s performance or extend its useful life are capitalized as part of the asset’s cost. Accordingly, the building repairs are capitalized. The substitution of a better computer system is classified as an improvement, and the costs also should be capitalized. Moreover, the entity capitalizes the costs of a rearrangement of the configurations of the offices and open work spaces that (1) requires material outlays, (2) is separable from recurring expenses, and (3) provides probable future benefits. However, expenditures that merely maintain the asset at an acceptable level of productivity are expensed as they are incurred. Thus, the costs of painting the building are routine, minor outlays that should be expensed immediately.