Question

E10-20 Expenditures After Acquisition McClain Company incurred the following expenditures during 2016: Apr. 9 June 29 Sept. 12 Dec. 28 The air conditioning system in the old manufacturing facility was replaced for $83,000. The old air conditioning system had a cost of $74,000 and a book value of $2,000. The old air conditioning system had no scrap value. Annual maintenance of $38,000 was performed. The roof of the old manufacturing facility is replaced at a cost of $65,000. This expenditure substantially extended the life of the facility. A new wing was added to the manufacturing facility at a cost of $275,000. This expenditure substantially increased the productive capacity of the plant. Required: 1. Prepare journal entries to record McClain’s expenditures for 2016. 2. Next Level What is the effect on the financial statements if management had improperly accounted for the: a. addition of the new wing to the manufacturing facility b. annual maintenance expenditures

Answer 1

1.

Date	Particulars	Amount	Amount
		in $'
39,904	Air conditioner(New)	83,000
	To Bank		83,000
39,904	Loss on AC(old)	2,000
	To Air conditioner (OLD)		2,000
47,270	Annual maintenance expenses	38,000
	To Bank		38,000
41,153	Air conditioner(New)	65,000
	To Bank		65,000
47,088	Air conditioner(New)	2,75,000
	To Bank		275000

2.

Effect of Improperly accounted:

Additions of new wing:

Expenditure incurred for new wing to the manufacturing facility which enhances useful life of the asset i.e air conditioning system, and derives economic benefits over a period, it is treated as Capital expenditure i.e added to the cost of assets.

Erroneously if it is treated as revenue expenditure, consequently net profit would be undervalued.

Annual Maintenance Expenditure:

Expenditure incurred for annual maintenance is revenue expenditure is charged to expenses as soon as the cost incurred.

Erroneously if it is treated as capital expenditure, consequently net profit would be overvalued.