Exercise 8-15A Revision of estimated useful life

Accounting for Long-Term Operational Assets

Exercise 8-15A Revision of estimated useful life

On January 1, Year 1, Poultry Processing Company purchased a freezer and related installation equipment for $42,000. The equipment had a three-year estimated life with a $3,000 salvage value. Straight-line depreciation was used. At the beginning of Year 3, Poultry Processing revised the expected life of the asset to four years rather than three years. The salvage value was revised to $2,000.

Required
Compute the depreciation expense for each of the four years, Year 1 through Year 4.

Exercise 8-16A Distinguishing between revenue expenditures and capital expenditures

Bill’s Wrecker Service has just completed a minor repair on a tow truck. The repair cost was $1,550, and the book value prior to the repair was $6,500. In addition, the company spent $12,000 to replace the roof on a building. The new roof extended the life of the building by five years. Prior to the roof replacement, the general ledger reflected the Building account at $85,000 and related Accumulated Depreciation account at $32,000.

Required
After the work was completed, what book value should appear on the balance sheet for the tow truck and the building?

Exercise 8-17A Effect of revenue expenditures versus capital expenditures on financial statements

Sellers Construction Company purchased a compressor for $28,000 cash. It had an estimated useful life of four years and a $4,000 salvage value. At the beginning of the third year of use, the company spent an additional $6,000 related to the equipment. The company’s financial condition just prior to this expenditure is shown in the following statements model:

Required
Record the $6,000 expenditure in the statements model under each of the following independent assumptions:
a. The expenditure was for routine maintenance.
b. The expenditure extended the compressor’s life.
c. The expenditure improved the compressor’s operating capacity.

Exercise 8-18A Effect of revenue expenditures versus capital expenditures on financial statements

On January 1, Year 1, Webb Construction Company overhauled four cranes, resulting in a slight increase in the life of the cranes. Such overhauls occur regularly at two-year intervals and have been treated as a maintenance expense in the past. Management is considering whether to capitalize this year’s $22,000 cash cost in the Cranes asset account or to expense it as a maintenance expense. Assume that the cranes have a remaining useful life of two years and no expected salvage value. Assume straight-line depreciation.

Required
a. Determine the amount of additional depreciation expense Webb would recognize in Year 1 and Year 2 if the cost were capitalized in the Cranes account.
b. Determine the amount of expense Webb would recognize in Year 1 and Year 2 if the cost were recognized as maintenance expense.
c. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were capitalized and expensed through depreciation charges.
d. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were recognized as maintenance expense.