Question

In July, one of our saws broke down. The cost of $11,500 in repairs is included in repairs and maintenance. The repair company claims the repairs will increase the saw's service capacity, cut production time by 10%, and reduce waste by 5% to 10%. The manufacturing staff really did see a difference in the performance of the saw after the repairs. The saw is expected to last another five years beyond the date of repair. Modern uses the straight-line method for amortization purposes and pro-rates for the number of months the asset was owned in the year.

Answer 1

The $11,500 repair of the saw is likely a capital expenditure and should be amortized over its remaining service life of five years using the straight-line method, with the first year's expense prorated for six months.

Step-by-step explanation:

The discussion presented revolves around the repair and maintenance of a saw used in production and the subsequent decision about how to manage the accounting for the repair costs. To address this, we must understand the concept of capital expenditure and how it is treated when a repair extends the life of an asset, as well as how to amortize the cost.

Given the saw's increased service capacity and reduced production time, the $11,500 repair cost can be considered a capital expenditure, which should be amortized over the expected remaining life of the saw.

Using the straight-line method of amortization, the cost would be spread equally over the five years the saw is expected to last. Since the saw broke down in July, the amortization for the first year would be prorated for the six months remaining in that year.