Effect of revenue expenditures versus capital expenditures on financial statements
On January 1, 2012, Valley Power Company overhauled four turbine engines that generate power for customers. The overhaul resulted in a slight increase in the capacity of the engines to produce power. 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 $25,000 cash cost in the engine asset account or to expense it as a maintenance expense. Assume that the engines 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 Valley would recognize in 2012 and 2013 if the cost were capitalized in the Engine account.
b. Determine the amount of expense Valley would recognize in 2012 and 2013 if the cost were recognized as maintenance expense.
c. Determine the effect of the overhaul on cash flow from operating activities for 2012 and 2013 if the cost were capitalized and expensed through depreciation charges.
d. Determine the effect of the overhaul on cash flow from operating activities for 2012 and 2013 if the cost were recognized as maintenance expense.
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