Page 429 - Accounting Principles (A Business Perspective)

10. Property, plant, and equipment

Exhibit 88: Expenditures on plant assets after acquisition

Accountants treat as expenses those recurring and/or minor expenditures that neither add to the asset's service-
rendering quality nor extend its quantity of services beyond its original estimated useful life. Thus, firms
immediately expense regular maintenance (lubricating a machine) and ordinary repairs (replacing a broken fan belt
on an automobile) as revenue expenditures. For example, a company that spends USD 190 to repair a machine after
using it for some time, debits Maintenance Expense or Repairs Expense.
Low-cost items Most businesses purchase low-cost items that provide years of service, such as

paperweights, hammers, wrenches, and drills. Because of the small dollar amounts involved, it is impractical to use
the ordinary depreciation methods for such assets, and it is often costly to maintain records of individual items.
Also, the effect of low-cost items on the financial statements is not significant. Accordingly, it is more efficient to
record the items as expenses when they are purchased. For instance, many companies charge any expenditure less
than an arbitrary minimum, say, USD 100, to expense regardless of its impact on the asset's useful life. This
practice of accounting for such low unit cost items as expenses is an example of the modifying convention of
materiality that was discussed in Chapter 5. In Exhibit 88, we summarize expenditures on plant assets after
acquisition.
In practice, it is difficult to decide whether to debit an expenditure to the asset account or to the accumulated

depreciation account. For example, some expenditures seem to affect both the quality and quantity of services.
Even if the wrong account were debited for the expenditure, the book value of the plant asset at that point would be
the same amount it would have been if the correct account had been debited. However, both the asset and
accumulated depreciation accounts would be misstated.
As an example of the effect of misstated asset and accumulated depreciation accounts, assume Watson Company
had an asset that had originally cost USD 15,000 and had been depreciated to a book value of USD 6,000 at the
beginning of 2010. At that time, Watson estimated the equipment had a remaining useful life of two years. The

company spent USD 4,000 in early January 2010 to install a new motor in the equipment. This motor extended the
useful life of the asset four years beyond the original estimate. Since the expenditure extended the life, the firm
should capitalize it by a debit to the accumulated depreciation account. We show the calculations for depreciation

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