Sellers Construction Company purchased a compressor for $101,700 cash. It had an estimated useful life of four years and a $11,700 salvage value. At the beginning of the third year of use, the company spent an additional $7,980 related to the equipment. The company's financial condition just prior to this expenditure is shown in the horizontal statements model. Required Record the $7,980 expenditure in the statements model under each of the following independent assumptions: (In the Statement of Cash Flows column, use the initials "OA" for operating activities, "FA" for financing activities, and "IA" for investing activity. Enter any decreases to account balances and cash outflows with a minus sign. Not all cells require input.) a. The expenditure was for routine maintenance. b. The expenditure extended the compressor's life. c. The expenditure improved the compressor's operating capacity. Balance a b. C. Cash Assets + 13,120 + + + + Balance Sheet Book Value of Compressor 56,700 = = = = SELLERS CONSTRUCTION COMPANY Horizontal Statements Model Stockholders' Equity Common Stock + 23,000 + + + + Retained Earnings 46,820 Revenue Income Statement Expenses Net Income Statement of Cash Flows
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
In accounting, when any expenditure is incurred on a capital asset that improves the efficiency or operating capacity of the asset or increases the economic life of the asset then that expense is capitalized and added to the value of the asset and not be treated as a normal expense under income statement as it is an investing activity. But when an expense is incurred as a routine maintenance and repair expense then it will be treated under the income statement as an operating activity.
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