Question

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

Short answer

Additions are capitalized in the asset cost. A major repair is treated as an addition, improvement, or replacement based on the nature of the repair. Improvement or replacement treatment is based on whether the carrying value is known or not.

Step-by-step solution

Treatment of Additions

The company uses it to capitalize on the cost of any addition to the plant assets. The company capitalizes on the cost because new assets are added by the company in the existing plant assets.

Treatment of major repairs

Treatment of major repair depends on the type of major repair. A major repair is treated as the addition, improvement, or replacement.

Treatment of improvement or replacement

Replacement adds the new assets or parts but the improvement did not add anything to the plant asset. If the carrying value of the old asset is known then the improvement or replacement cost is capitalized. If the carrying amount is unknown then following two situations determine the treatment of improvement or replacement:

(a) When the improvement or replacement increases the useful life of the asset then the cost of improvement or replacement is added to the accumulated depreciation account.

(b) When the improvement or replacement leads to an increase in efficiency of asset then the cost of improvement or replacement is capitalized.