On January 1, Year 2, 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 maintenance expense in the past. Management is considering whether to capitalize this year's $28,310 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 2 and Year 3 if the cost were capitalized in the Cranes account. b. Determine the amount of expense Webb would recognize in Year 2 and Year 3 if the cost were recognized as maintenance expense. c. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were capitalized and expensed through depreciation charges. (Cash outflows should be indicated with a minus sign.) d. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were recognized as maintenance expense. (Cash outflows should be indicated with a minus sign.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts for you. To get the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.
If the cash cost is capitalized then, it will be recorded as an asset under the balance sheet and will be depreciated for the remaining useful life. If the cash cost is expensed as maintenance expense then, it will be recorded as an expense under the income statement.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
