Question

5. (7 points) King Donovan Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company's plant asset book value is currently $800,000, as indicated below. Original cost $1,200,000 Accumulated depreciation 400,000 Book value $ 800,000 During the current year, the following expenditures were made to the plant facility. (a) Because of increased demands for its product, the company increased its plant capacity by building a new addition at a cost of $270,000. (b) The entire plant was repainted at a cost of $23,000. (c) The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of $61,000. Book value of the old roof was $41,000. (d) The electrical system was completely updated at a cost of $22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating. (0) A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building. Instructions Indicate the accounting treatment of each scenario (i.e. capitalize or expense, and if capitalize, any specific accounting treatment. Hint: See PowerPoint slide discussing Additions, Replacements, Rearrangements, etc.).

Answer 1

a	Plant a/c…Dr.	$270000
	To Cash a/c		$270000
	There is no major accounting problem, when it is addition. Company capitalize any addition to
	Plant assets because new asset has been created.
b	Improvement expense a/c…Dr.	$23000
	To cash a/c		$23000
	It is an expense, cannot capitalize
c	Plant assets a/c…Dr	$61000
	Accumulated Dep a/c…Dr	$19000
	Loss on disposal a/c…Dr	$41000
	To Plant assets a/c		$60000
	To cash a/c		$61000
	Replacement of a carrying value, so the old asset needs to be written off, and new asset needs
	to be shown. Company should capitalize this replacement.
d	Repair expense a/c…Dr	$22000
	To cash a/c		$22000
	It is an expense , company cannot capitalize because the carrying value of the old system is
	not known and the repair does not extend the life of the system.
e	Accumulated Depreciation a/c…Dr.	$47000
	To cash a/c		$47000
	The carrying value of the old structure is not known , however we know that the new repair
	added extension to the life of the structure . So repair can reduce accumulated depreciation