On January 1, Year 2, Webb Construction Company overhauled four cranes resulting in a slight increase in the life of the cranes. Such overhauls occur regularly at two-year intervals and have been treated as maintenance expense in the past. Management is considering whether to capitalize this year's $28,310 cash cost in the Cranes asset account or to expense it as a maintenance expense. Assume that the cranes 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 Webb would recognize in Year 2 and Year 3 if the cost were capitalized in the Cranes account. b. Determine the amount of expense Webb would recognize in Year 2 and Year 3 if the cost were recognized as maintenance expense. c. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were capitalized and expensed through depreciation charges. (Cash outflows should be indicated with a minus sign.) d. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were recognized as maintenance expense. (Cash outflows should be indicated with a minus sign.)

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On January 1, Year 2, Webb Construction Company overhauled four cranes resulting in a slight increase in the life of the cranes. Such
overhauls occur regularly at two-year intervals and have been treated as maintenance expense in the past. Management is
considering whether to capitalize this year's $28,310 cash cost
expense. Assume that the cranes have a remaining useful life of two years and no expected salvage value. Assume straight-line
depreciation.
the Cranes asset account or to expense it as a maintenance
Required
a. Determine the amount of additional depreciation expense Webb would recognize in Year 2 and Year 3 if the cost were capitalized in
the Cranes account.
b. Determine the amount of expense Webb would recognize in Year 2 and Year 3 if the cost were recognized as maintenance
expense.
c. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were capitalized and
expensed through depreciation charges. (Cash outflows should be indicated with a minus sign.)
d. Determine the effect of the overhaul on cash flow from operating activities for Year 2 and Year 3 if the cost were recognized as
maintenance expense. (Cash outflows should be indicated with a minus sign.)

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Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts for you. To get the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.

If the cash cost is capitalized then, it will be recorded as an asset under the balance sheet and will be depreciated for the remaining useful life. If the cash cost is expensed as maintenance expense then, it will be recorded as an expense under the income statement.

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