Below are several situations related to replacements and repairs. For each case, prepare the necessary journal entry to record the transaction. Please provide a short justification for your chosen treatment.
Case A: Every three years a major component (Part #45) in a machine must be replaced. By doing this regular but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine could be used only for a maximum of six years. W hen the machine was originally purchased for $9,000,000 it was set up as one asset and depreciated over its estimated useful life of 15 years. Recently this repair was completed at a cost of $750,000 for Part #45. The earlier Part #45 cost $650,000 when it was installed three years ago. Neither the old nor the new Part #45 has residual value.
Case B: Same as Case A except Part #45 is recognized as a separate PPE asset and depreciated over three years.
Case C: An important piece of equipment requires major maintenance. Management has decided to upgrade the machine in the process, by installing a new component which will extend the useful life of the machine from three remaining years to five more years. The regular part could have been purchased for $100,000 but the more able part cost $ 175,000. The replaced part was not set up as a separate asset when the machine was purchased.
Case D: A large piece of earth-moving equipment was upgraded at a cost of $400,000 so that it can self-unload. After the upgrade was completed, management estimated that this feature would save the company $50,000 a year for the next six years.
Case E: A truck has a new engine installed for $140,000 which will increase gas mileage by 25% and reduce pollution. The truck and engine were not set up as separate assets. Management confidently estimates that the cost of the engine is one-third of the overall cost of the truck. The truck’s original cost was $300,000 and it is 40% depreciated.
Case F: A car rental company has a fleet of 40,000 cars. Every three months all the cars are given scheduled oil changes, tire rotation, and replacement of small components. The cost per car is $150, which is $40 in parts and $110 for the wages of in-house mechanics. This is $6,000,000 in total. For half of the cars a satellite radio receiver was installed at a cost of $75 each (total $1,500,000). The gadget allows the car to receive satellite radio. The company will provide this service free and promote it heavily to increase ridership. This advertising campaign will cost $2,500,000. After the original free use of the satellite feature, the company will charge later users a fee for the use of satellite radio.