Page 428 - Accounting Principles (A Business Perspective)

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ability of assets, firms charge them to the asset accounts. For example, installing an air conditioner in an
automobile that did not previously have one is a betterment. The debit for such an expenditure is to the asset
account, Automobiles.

Occasionally, expenditures made on plant assets extend the quantity of services beyond the original estimate but
do not improve the quality of the services. Since these expenditures benefit an increased number of future periods,
accountants capitalize rather than expense them. However, since there is no visible, tangible addition to, or
improvement in, the quality of services, they charge the expenditures to the accumulated depreciation account, thus
reducing the credit balance in that account. Such expenditures cancel a part of the existing accumulated
depreciation; firms often call them extraordinary repairs.
To illustrate, assume that after operating a press for four years, a company spent USD 5,000 to recondition the

press. The reconditioning increased the machine's life to 14 years instead of the original estimate of 10 years. The
journal entry to record the extraordinary repair is:
Accumulated Depreciation-Machinery (+A) 5,000
Cash (for Accounts Payable) (-A) 5,000
To record the cost of reconditioning a press.
Originally, the press cost USD 40,000, had an estimated useful life of 10 years, and had no estimated salvage
value. At the end of the fourth year, the balance in its accumulated depreciation account under the straight-line
method is [(USD 40,000/10) X 4] = USD 16,000. After debiting the USD 5,000 spent to recondition the press to
the accumulated depreciation account, the balances in the asset account and its related accumulated depreciation

account are as shown in the last column:
Before After
Extraordinary Extraordinary
Repair Repair
Press $40,000 $40,000
Accumulated depreciation 16,000 11,000
Book value
(end of four years) $24,000 $29,000
In effect, the expenditure increases the carrying amount (book value) of the asset by reducing its contra account,
accumulated depreciation. Under the straight-line method, we would divide the new book value of the press, USD
29,000, equally among the 10 remaining years in amounts of USD 2,900 per year (assuming that the estimated
salvage value is still zero).
As a practical matter, expenditures for major repairs not extending the asset's life are sometimes charged to

accumulated depreciation. This avoids distorting net income by expensing these expenditures in the year incurred.
Then, firms calculate a revised depreciation expense, and spread the cost of major repairs over a number of years.
This treatment is not theoretically correct.
To illustrate, assume the same facts as in the previous example except that the USD 5,000 expenditure did not
extend the life of the asset. Because of the size of this expenditure, the company still charges it to accumulated
depreciation. Now, it would spread the USD 29,000 remaining book value over the remaining six years of the life of
the press. Under the straight-line method, annual depreciation would then be (USD 29,000/6) = USD 4,833.

Accounting Principles: A Business Perspective 429 A Global Text