Question

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 $20,920 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.

Answer 1

		Year 1	Year 2
a.	Depreciation Expense (20920/2)	$10,460	$10,460
b.	Maintenance Expense ( it will be recorded as expense in year-1)	$20,920	$0
c.	Operating Activities ( because it will be treated as investing activity)	$0	$0
d.	Operating Activities ( it will be cash outflow due to incurred as expense)	$20,920	$0