3. Plant Assets - Additional Expenditures

What do plant assets require?

Maintenance, repairs, and improvements.

What must we decide for maintenance, repairs, and improvements?

Whether to expense or capitalize these expenditures (to capitalize is to increase the asset account).

What are revenue expenditures?

Costs that do not materially increase the plant asset's life or capabilities.

How are revenue expenditures recorded?

As expenses on the current-period income statement.

What is is revenue expenditures called?

Income statement expenditures.

What are capital expenditures?

Costs of plant assets that provide benefits for longer than the current period.

How do capital expenditures affect some financial statement?

They increase the asset on the balance sheet.

What is another name for capital expenditures?

Balance sheet expenditures

What are ordinary repairs?

expenditures to keep an asset in good operating condition.

Do ordinary repairs extend an asset’s useful life or increase its productivity?

Ordinary repairs do not extend an asset's useful life or increase its productivity beyond original expectations.

What are examples of ordinary repairs?

Normal costs of cleaning, lubricating, changing oil, and replacing small parts of a machine.

What types of expenditures are ordinary repairs?

Revenue expenditures. This means their costs are reported as expenses on the current-period income statement.

What is the entry to record repairs costs if the company reports that “maintenance and repair costs are expensed as incurred”?

debit Repairs Expense, credit Cash

What types of expenditures are betterments and extraordinary repairs?

Capital expenditures (increase the asset on the balance sheet)

What are betterment (or improvements)?

are expenditures that make a plant asset more efficient or productive.

What do betterments often involve?

Adding a component to an asset or replacing an old component with a better one and does not always increase useful life.

What is an example of betterments?

replacing manual controls on a machine with automatic controls.

What is a special type of betterment?

An addition

Give an example of an addition.

adding a new dock to a warehouse.

Since a betterment benefits future periods, how is it recorded in a financial statement?

debited to the asset account as a capital expenditure.

How is the asset depreciated after the betterment?

The new book value (less salvage value) is then depreciated over the asset's remaining useful life.

What is the entry to add the cost of the betterment to for example a Machinery account (assume no salvage value)

debit Machinery, credit Cash

Review example under betterments

What are extraordinary repairs?

are expenditures that extend the asset's useful life beyond its original estimate.

How is the cost of extraordinary repairs recorded?

debit Asset account (such as Equipment), credit Cash

Review

- Betterments and extraordinary repairs are expensed in the future by debiting the Asset account and then depreciating it over time.

Review figure under Extraordinary repairs