Lesson 4

Question 1

For costs to be capitalized, what are the three conditions?

Answer 1

One of three need to be meet.
1. The useful life of the asset must be increased.
2. The quantity of units produced from the asset must be increased.
3. The quality of the units produced must be enhanced.

Question 2

What costs should be expensed immediately?

Answer 2

1. ordinary repairs that maintain the existing condition of the asset.
2. Restore it to normal operating efficiency.

Question 3

Capital Expenditure (asset)

Answer 3

An expenditure on an asset whereby (1) the useful life of the asset is increased, (2) the quantity of the units produced from the asset is increased, or (3) the quality of the units produced is enhanced.

Question 4

Revenue Expenditure (expense)

Answer 4

an expenditure on an asset whereby (1) the useful life of the asset does not increase, (2) the quantity of units produced form the asset does not increase, (3) the quality of the units produced is not enhanced.

Question 5

What are the 4 major types of expenditures?

Answer 5

1. Additions
2. Improvements and Replacements
3. Rearrangment and Reinstallation
4. Repairs

Question 6

Additions

Answer 6

increase or extension of existing assets

Question 7

Improvements and Replacements

Answer 7

substitution of an improved asset for an existing one.

Question 8

Rearrangement and reinstallation

Answer 8

movement of assets from one location to another

Question 9

Repairs

Answer 9

expenditures that maintain assets in condition for operation

Question 10

What is the substitution approach?

Answer 10

If the carrying amount of the old asset is available. it is then a simple matter to remove the cost of the old asset and replace it with the cost of the new asset. (book value)

Question 11

What are the three accounting methods for capitalized expenditures?

Answer 11

1. Use the substitution approach.
2. Capitalize the new cost.
3. Charge to accumulated depreciation

Question 12

When would you consider a repair as a capitalized cost?

Answer 12

When the repair benefits severals periods.

Question 13

How are expenditures that extend the useful life of a plant asset without improving its quantity or quality accounted for?

Answer 13

By debiting accumulated depreciation

Question 14

In accounting for plant assets, what outlay, made subsequent to acquisition, should be fully expensed in the period the expenditure is made?

Answer 14

Expenditures made to maintain an existing asset.
Repairs are expensed.

Question 15

On January 2, 2020, York Corp. replaced its boiler with a more efficient one. The following information was available on that date:
Purchase price of new boiler: $150,000
Carrying amount of the old boiler $10,000
Fair value of old boiler $4,000
Installation cost of new boiler $20,000
The old boiler was sold for $4,000
What amount should York capitalize as the cost of the new boiler?

Answer 15

$170,000
When an asset is replaced, the cost and accumulated depreciation of the old asset is removed and any gain or loss is recognized. The new piece of equipment is recorded as a new asset. The cost of the new boiler is $150,000 + $20,000 installation = $170,000.