McKinney Library Services has had a file server (computer) for seven years. At the beginning of the eighth year, it wasn’t performing as well as it should have been. First, McKinney had the server cleaned, which cost $125. Then, the company had the annual maintenance performed, which cost $275. Finally, at the beginning of the eighth year, McKinney completed a major upgrade of the server that not only fixed it, but also added new functionality to it and extended the useful life by four years (to a total of 12 years) with no salvage value. The overhaul cost $25,000. (Originally, the server cost $45,000, had a salvage value of $5,000, and an estimated useful life of eight years.)

1. Which of these costs are capital expenditures? How would these amounts appear on the financial statements?

2. Which are revenue expenditures? How would these amounts appear on the financial statements?

3. Assuming McKinney uses the straight-line method of depreciation, how much depreciation expense will be reported on the income statements for years 8–12?