On January 1, Year 1, Mid state Power Company overhauled four turbine engines that generate power for
Question:
On January 1, Year 1, Mid state Power Company overhauled four turbine engines that generate power for customers. The overhaul resulted in a slight increase in the capacity of the engines to produce power. 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 $22,000 cash cost in the engine asset account or to expense it as a maintenance expense. Assume that the engines 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 Midstate would recognize in Year 1 and Year 2 if the cost were capitalized in the Engine account.
b. Determine the amount of expense Midstate 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.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Step by Step Answer:
Introductory Financial Accounting for Business
ISBN: 978-1260299441
1st edition
Authors: Thomas Edmonds, Christopher Edmonds