Ordinary Repairs vs. Capital Improvements quiz #1 Flashcards
Ordinary Repairs vs. Capital Improvements quiz #1
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What is the primary difference between ordinary repairs and capital improvements in accounting for fixed assets?
Ordinary repairs are routine maintenance costs that keep an asset operational and are expensed immediately on the income statement, while capital improvements are significant enhancements that extend the asset's useful life or increase its capacity and are capitalized on the balance sheet and depreciated over time. How should a company account for the cost of replacing worn gears in a machine if the replacement does not significantly extend the machine's useful life?
The cost of replacing worn gears that does not significantly extend the machine's useful life should be treated as an ordinary repair and expensed immediately on the income statement. When a company modifies a machine to increase its output capacity, how is this expenditure recorded in the financial statements?
When a machine is modified to increase its output capacity, the expenditure is classified as a capital improvement, added to the asset's value on the balance sheet, and depreciated over the asset's useful life. What is the main accounting treatment difference between ordinary repairs and capital improvements for fixed assets?
Ordinary repairs are expensed immediately on the income statement, while capital improvements are capitalized on the balance sheet and depreciated over time. How are routine maintenance costs, such as greasing machine gears, recorded in the financial statements?
Routine maintenance costs are treated as maintenance expenses and are expensed immediately on the income statement. If a company replaces worn gears in a machine without significantly extending its useful life, how should this cost be accounted for?
The cost should be treated as an ordinary repair and expensed immediately on the income statement. What type of expenditure is modifying a machine to increase its output capacity, and how is it recorded?
Modifying a machine to increase output capacity is a capital improvement, which is added to the asset's value on the balance sheet and depreciated over its useful life. What journal entry is made when a company incurs an ordinary repair expense paid in cash?
The company debits maintenance expense and credits cash for the amount spent. How does a capital improvement affect the value of a fixed asset on the balance sheet?
A capital improvement increases the asset's value on the balance sheet and is depreciated over the asset's remaining useful life. Why is it important to analyze the nature of expenditures on fixed assets before deciding on the accounting treatment?
It is important because only expenditures that significantly extend the asset's life or capacity should be capitalized, while routine maintenance should be expensed.
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