Chapter 29 – Machinery (Capital Expenditures and Revenue Expenditures)

Problem 29 – 3

Second hand market value (not on installation basis, shall be recorded on FV) 2,400,000

Overhaul and repairs 150,000

Installation 110,000

Testing 110,000
Hauling 10,000

Safety device 250,000

Total cost of machine 1,200,000

• Overhaul - take apart (a piece of machinery or equipment) in order to examine it and repair it if
necessary.
• Hauling - transport in a truck or cart.

• If a machinery is removed and retired to make room for the installation of a new one, the removal cost
not previously recognized as a provision is charge to expense.

• Cash proceeds from sale of the old machine replaced, cost of spare parts to cover breakdowns, cost of
repairing damage to machine caused when machine was dropped during the installation, and cost of
training workers to operate the machine, is not normally incurred when machinery is purchased. Hence,
not included in the cost of machinery.

Problem 29 – 5
• “The chief engineer spent two-thirds of his time during trial run of the new machine. The monthly
salary is P60,000.”

Salary of engineer: 2/3 x P60,000 = 40,000

• The entity was granted a cash allowance of P100,000 by the supplier because the machine proved to
be of less than standard performance quality.

Cash allowance ay kabawasan sa cost.

Payment for strengthening the floor to support the weight of the new machine is not normally incurred
when machinery is purchased. Hence, not included in the cost of machinery.

Problem 29-5 and Problem 29-8

Referring to continuing and frequent repairs:

Extraordinary repairs are material replacement of parts, involving large sums and are frequently
encountered. Extraordinary repairs are usually capitalized.

Ordinary repairs are minor replacement of parts, involving small sums and are frequently encountered.
Ordinary repairs are normally charged to expense when incurred

Referring to repainting of the plant building, and partial replacement of roof tiles a

Painting is usually a repair. You don't depreciate repairs. You depreciate improvements.

Painting can be an improvement in some cases- We don't know anything other than that you painted, so
it would be impossible to tell you an exact answer without more info.

Repainting the exterior of your residential rental property:

● By itself, the cost of painting the exterior of a building is generally a currently deductible repair
expense because merely painting isn't an improvement under the capitalization rules.

● However, if the painting directly benefits or is incurred as part of a larger project that's a capital
improvement to the building structure, then the cost of the painting is considered part of the
capital improvement and is subject to capitalization.

● In this case, the painting is incurred as part of the overall restoration of the building structure.
Therefore, the repainting costs are part of the capital improvements and should be capitalized
and depreciated as the same class of property that was restored, as discussed above.

https://ttlc.intuit.com/community/investments-and-rental-properties/discussion/do-i-need-to-
depreciate-having-a-rental-property-painted-cpa-says-yes-turbo-tax-question-say-no/00/104736

“Total amount should be capitalized”

- generic

Problem 29 – 9

Initial design fee 150,000

Purchase of executive chairs and desks 200,000

Storm windows 500,000

Installation of automatic door 200,000

Overhead crane 350,000
 Total capital expenditures 1,400,000

Initial design fee for proposed extension of office building – additions

Purchase of executive chairs and desks
Storm windows – improvement
Automatic door – improvement
Overhead crane to speed up production

Future economic benefit

In general, a subsequent cost on an item of ppe will benefit future periods or increase the future service
potential of an asset when:

a. The expenditure extends the life of the property.

b. The expenditure increases the capacity of the property and quality of output, for example, by
upgrading machine parts.
c. The expenditure improves the efficiency and safety of the property for example, by adopting a new
production process leading to large reduction in operating cost.

If the subsequent cost will increase the future service potential of the asset, the cost would be
capitalized.

If the subsequent cost merely maintains the existing level of standard performance, the cost should be
expensed when incurred

New condenser for central air conditioning unit, sealing of roof leaks in production area, replacement of
broken gear on machine and replacement of door to production area

- The subsequent cost merely maintains the existing level of standard performance, the cost should be
expensed when incurred
- Replacements also involve substitution but the new asset is not better than the asset when acquired.

Service contract on office equipment

- The net invoice unit price of the property including the cost of installation, modification, attachments,
accessories or auxiliary apparatus necessary to make the property usable for its intended purpose.
Ancillary charges, such as taxes, duty, protective in-transit insurance, freight, and installation will be
included in the overall costs if these charges are listed on the same invoice. Service contract costs,
unless included in the purchase price of the equipment, should not be included.

https://www.brown.edu/about/administration/policies/equipment-capitalization

Ancillary – providing support or help.

Problem 29 -10
 Materials 600,000

Labor 400,000
Installation 60,000

Trail run 30,000

Discount (40,000)

Overhead 150,000
1,200,000

Cost of dismantling old machine (not stated or impliedly that the entity has present obligation).
Expensed.

“What is the cost of machinery?” – “What is the capitalizable cost of machinery?”

Adjusting entries

1. Loss on retirement of old machinery 6,000

Machinery (20,000 – 14,000)* 6,000

2. Purchase discount 40,000

Machinery 40,000

3. Machinery 150,000
Factory overhead 150,000

4. Profit on construction 100,000

Machinery 100,000

5. Tools 90,000
Machinery 90,0000

6. Depreciation – tools 10,000

Tools (90,000/3 x 4/12) 10,000

 7. Machinery 128,600
Accumulated depreciation (1,200,000/10 x 4/12) 40,000

Depreciation – Machinery 88,600

or**

Accumulated depreciation 128,600

Depreciation - Machinery 128,600

Depreciation - Machinery 40,000

Accumulated depreciation 40,000

* Cost of dismantling old machine = 20,000; Cash proceeds from sale of old machine = 14,000.
** Same effect

Depreciation recorded 128,600

Correct depreciation (1,200,000/10 x 4/12) 40,000

Overdepreciation 88,600

Problem 29-11

1. Machinery 5,000,000
Cash 5,000,000

2. Depreciation 450,000

Accumulated depreciation 450,000

3. Depreciation (3,600,000/6*) 600,000

Accumulated depreciation 600,000
 Cost 5,000,000

Accumulated depreciation
2019 450,000

2020 450,000 (900,000)

Carrying amount 4,100,000*

Residual value 500,000

Remaining depreciable cost – 1/1/2021 3,600,000

*On January 1, 2021, the entity decided that the original estimate of useful life should be reduced by
two years. The residual value did not change.

* 6 - useful life:
2019 - 10 years
2020 - 9 years
2021 - 8 years - 2 years = 6 years

4. Machinery 300,000

Cash 300,000

5. Depreciation (3,300,000/5*) 660,000

Accumulated depreciation 660,000

Cost (5,000,000 + 300,000) 5,300,000

Accumulated depreciation (900,000 + 600,000) 1,500,000

Carrying amount - 1/1/2022 3,800,000

Residual value 500,000

Remaining depreciable amount – 1/1/2022 3,300,000

* 5 - remaining useful life

Problem 29 - 12
 Accumulated depreciation 100,000
(2,500,000/50* x 2**)
Loss on retirement of building 2,400,000
Cash 2,500,000
* 50 - The old roof is part of the building that has 50 estimated useful life;
** 2 - is the number of prior years (the number of years until replacement) respect to accumulated
depreciation of 2019 and 2020.

Rearrangement cost
- is the relocation or redeployment of an existing property, plant and equipment.

PAS 16, paragraph 20, provides that recognition of costs in the carrying amount of property, plant and
equipment ceases when the asset is in the location and condition for the intended use.

In other words, IFRS expressly mandates that the costs of relocating existing property, plant and
equipment or costs of reorganizing part or all of an entity’s operations are not capitalized but expensed
as incurred.

The rearrangement merely maintains the existing level of standard performance of the asset.

Accounting for major replacement

An important consideration in determining the appropriate accounting treatment for a replacement is
whether the original part of an existing asset separately identifiable.

If separate identification is practicable, the major replacement is debited to the asset account.

The cost of the part eliminated and the related accumulated depreciation are removed from the
accounts and the remaining carrying amount of the old part is treated as loss.

If it is not practicable for an entity to determine the carrying amount of the replaced part, it may use the
cost of the replacement as an indication of the “likely original cost” of the replaced part at the time it
was acquired or constructed.

However, the current replacement cost shall be discounted.

Depreciation (10,700,000 - 212,500

500,000/48*)
Accumulated depreciation 212,500

Building (10,500,000 + 3,000,000 - 11,000,000

2,500,000**)
Accumulated depreciation (400,000 - (300,000)
100,000)
 Carrying amount - 1/1/2020 10, 700,000
**carrying amount of old roof ceases, treated as loss. Thus, treated as a deduction to carrying amount of
the building.

* 48 - remaining useful life

Problem 29 - 13

1.)

Discount on note payable 500,000

Machinery 500,000

Interest expense (500,000/10 x 37,500

9/12)
Discount on note payable 37,500

Accumulated Depreciation 75,000

Depreciation 75,000

Depreciation for 9 months 600,000

Depreciation for 12 months (600,000/ 9/12 or 800,000
75%)
Depreciable cost (800,000 x 5 years*) 4,000,000
* Straight line depreciation was recorded based on a five year life.

Per book Adjusted

Cost 5,000,000 4,500,000
Less: Residual value (5,000,000 - 1,000,000 1,000,000
4,000,000)
Depreciable amount 4,000,000 3,500,000

Correct depreciation for 9 months (3,500,000/5 x 525,000

9/12)
Less: Depreciation recorded 600,000
Overstatement 75,000

2.)

Interest expense 300,000

 Machinery (3,500,000 - 300,000
3,200,000 cash price)

Machinery 150,000
Freight in 150,000

Accumulated depreciation 30,000

Depreciation 30,000

Depreciation per book 700,000

Correct depreciation (3,350,000/5*) 670,000
Overstatement 30,000
*Straight line depreciation is based on five year life

3.)

Loss on exchange 390,000

Machinery 390,000

Further research:
• Problem 29 - 13 (auditing)