Question

(Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.

Instructions

For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.

1. __________ Improvement.
2. __________ Replacement of a minor broken part on a machine.
3. __________ Expenditure that increases the useful life of an existing asset.
4. __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
5. __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.
6. __________ Expenditure that increases the quality of the output of the productive asset.
7. __________ Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life.
8. __________ Ordinary repairs.

Short answer

Only items (b) and (h) are expensed, and the rest of the items will be capitalized.

Step-by-step solution

Meaning of Subsequent Expenditure

Subsequent expenditures refer to those expenditures that are incurred after the acquisition of the asset. These expenditures should either be capitalized or expensed.

Explaining the items that should be capitalized or expensed

S.no.	Items	Explanation
(a)	Improvement.	Improvement should be capitalized when the value is greater than $10,000.
(b)	Replacement of a minor broken part on a machine.	Replacing a small broken part on the machine prolongs the asset's life, so it needs to be expensed.
(c)	Expenditure that increases the useful life of an existing asset.	When an expense is incurred on an existing asset, increasing the asset's life and is beneficial in the future, this expense needs to be capitalized.
(d)	Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.	Any expense that increases the capacity and effectiveness of a productive asset should be capitalizedbecause its benefits are for a longer period.
(e)	Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.	The expense gives the asset the advantage of efficiency and effectiveness and also increases the asset's salvage value; the expense needs to be capitalized as it gives longevity to the asset.
(f)	Expenditure increases the quality of the output of the productive asset.	When expenditure incurred on the asset results in asset quality and productivity in the long run, then the expenditure should be capitalized as the efficiency of the asset is increased, which will be beneficial for the future.
(g)	Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life.	Improvement expense needs to becapitalized because it leads to long-term benefits. Assets improvement increases the efficiency and effectiveness of the asset.
(h)	Ordinary repairs	An ordinary expense is an expense that does not increase the efficiency and effectiveness of the asset. So it must be treated as an expense because its benefit is only for less than a year.