Question

Which of the following accurately describes the treatment of ordinary and extraordinary repairs? a. Ordinary repairs are capitalized, while extraordinary repairs are expensed.

b. Ordinary repairs are expensed, while extraordinary repairs are capitalized.
c. Both ordinary and extraordinary repairs are capitalized.
d. Both ordinary and extraordinary repairs are expensed.

Answer 1

Ordinary repairs are expensed because they maintain the asset rather than enhance its value or extend its life, while extraordinary repairs are capitalized because they significantly improve the asset and extend its useful life.

Step-by-step explanation:

The treatment of ordinary and extraordinary repairs in accounting varies. Ordinary repairs are typically considered as recurring expenses necessary for maintenance and are therefore expensed in the income statement of the period in which they occur. This is because they do not extend the useful life of the asset significantly beyond its original estimate. On the other hand, extraordinary repairs are major improvements that extend the asset’s useful life beyond its original estimate, increase its productive capacity, or enhance its efficiency. Hence, extraordinary repairs are capitalized, meaning their cost is added to the asset’s book value on the balance sheet and then depreciated over the new estimated useful life of the asset.