Question

(Analysis of Subsequent Expenditures) King Donovan Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company’s plant asset book value is currently \(800,000, as indicated below.

Original cost	\)1,200,000
Accumulated depreciation	400,000
Book value	\( 800,000

The following expenditures were made to the plant facility during the current year.

1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
2. The entire plant was repainted at a cost of \(23,000.
3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Short answer

1. Plant assets should be capitalized
2. Painting costs are considered ordinary repairs
3. Replacing the old plant roof is supposed to increase the service life of the property.
4. Conceptually, the book value of the old electricity system needs to be removed.
5. With an increase in useful life, a debit to accumulated depreciation occurs.

Step-by-step solution

Meaning of Subsequent Expenditure

Subsequent expenses are those incurred after an asset is recorded in the financial statement and delivered to the destination and state planned. Repairs, upkeep, overhauls, upgrades, and replacements could all cost money.

(a) Indicating the transaction and explaining its accounting records

Date	Accounts and Explanation	Debit($)	Credit($)
	Plant	270,000
	Cash		270,000
	(To record the addition made)

Plant assets are capitalized when they are added since a new asset has been created. As a result, this enhancement makes the plant more valuable.

(b) Indicating the transaction and detailing its accounting records

Date	Accounts and Explanation	Debit($)	Credit($)
	Improvement expense	23,000
	Cash		23,000
	(To record the improvement made)

Expenditures that do not improve the asset's service benefits are expensed. Painting expenditures are considered standard repairs since they keep the asset in good working order or return it to its previous state.

(c) Indicating the transaction and explaining its accounting records

Date	Accounts and Explanation	Debit($)	Credit($)
	Plant -roof	61,000
	Loss on disposal	41,000
	Plant-roof (old)		41,000
	Cash		61,000
	(To record the replacement made)

Investing in the new roof will increase the service potential of the asset.

(d) Indicating the transaction and detailing its accounting records.

Date	Accounts and Explanation	Debit($)	Credit($)
	Repair expense	22,000
	Cash		22,000
	(To record the repair expense)

The book value of the preceding electrical system needs to be conceptually removed. However, in practice, it is generally difficult, if not impossible, to determine this quantity. In this situation, one of two techniques is used.

The second method is to reduce accumulated depreciation, assuming the replacement will prolong the asset's useful life and recover part or all of the previous depreciation. The difficulty with our current position is that the useful life has not increased, so it is unfair to debit accumulated depreciation. Consequently, must include this expense in the cost of the plant facility.

(e) Indicating the transaction and explaining its accounting records.

Date	Accounts and Explanation	Debit($)	Credit($)
	Accumulated depreciation	47,000
	Cash		47,000
	(To record the addition made)

A detailed clarification is given in the transaction (d) answer. Since the asset's useful life has risen, a debit to Accumulated Depreciation appears to be the best option in this instance.