On January 1, 2012, Valley Power Company overhauled four turbine engines that ge
ID: 443322 • Letter: O
Question
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 $23,890 cash cost in the engine asset account or to expense it as a maintenance expense. Assume that the engines have a remaining useful life of two years and no expected salvage value. Assume straight-line depreciation.
Determine the amount of additional depreciation expense Valley would recognize in 2012 and 2013 if the cost were capitalized in the Engine account. (Omit the "$" sign in your response.)
Determine the amount of expense Valley would recognize in 2012 and 2013 if the cost were recognized as maintenance expense. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values. Omit the "$" sign in your response.)
Determine the effect of the overhaul on cash flow from operating activities for 2012 and 2013 if the cost were capitalized and expensed through depreciation charges. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values. Omit the "$" sign in your response.)
$ cash outflow from operating activities in 2012, $ cash outflow from operating activities in 2013 .
Determine the effect of the overhaul on cash flow from operating activities for 2012 and 2013 if the cost were recognized as maintenance expense. (Leave no cells blank - be certain to enter "0" wherever required. Input all amounts as positive values. Omit the "$" sign in your response.)
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 $23,890 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.
Explanation / Answer
Answer a:
Since the depreciation is straight line deprication and there is no salvage value, the additional depreciation expenses expected would be:
(Capitalized cost * number of turbines) / number of years
(23890 * 4)/2 = 95560/2 = 47780
47780 additional depreciation expense for 2012 and 2013.
Answer b:
If the cost is recognised as maintenance amount,
95560 of expense would be recognized in 2012 and 0 in 2013.
Answer c:
Capitalized cost = 95560
Cash outflow for 2012 = Capitalized cost - Depreciation = 95560 - 47780 = 47780
Cash outflow for 2013 = Capitalized cost - Depreciation = 47780 - 47780 = 0
47780 cash outflow from operating activities in 2012, 0 cash outflow from operating activities in 2013 .
Answer d:
Since the cost is maintenance expense for 2 years,
95560 cash outflow from operating activities in 2012 and 0 in 2013.
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