Question

Expenditures for major additions, improvements and flight equipment modifications are capitalized when such costs are determined to extend the useful life of the asset or are part of the cost of acquiring the asset. Expenditures for equipment overhaul costs of engines or airframes prior to their operational use are capitalized as part of the cost of such assets as they are costs required to ready the asset for its intended use. Maintenance and repairs costs are charged to expense as incurred.

Assume that FedEx made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for delivery trucks that serve the Denver area. The existing building originally cost $720,000, and by the end of 2010 (10 years), it was half depreciated on the basis of a 20-year estimated useful life and no residual value. Assume straight-line depreciation was used. During 2011, the following expenditures related to the building were made:

a. Ordinary repairs and maintenance expenditures for the year, $7,000 cash.
b. Extensive and major repairs to the roof of the building, $122,000 cash. These repairs were completed on December 31, 2011.
c. The new wing was completed on December 31, 2011, at a cash cost of $230,000.

Required:
Apply the policies of FedEx.

Answer 1

FedEx

Applying the policies of FedEx:

a and b. Total repairs and maintenance expenses to be charged to the income statement = $129,000 ($7,000 + $122,000).

c. The building extension cost of $230,000 will be capitalized.

The Building will now have a total cost value of $950,000 Accumulated Depreciation of $396,000.

Therefore, the net book value of building at the end of December 31, 2011 will be $554,000 ($950,000 - $396,000).

Step-by-step explanation:

a) Data and Analysis:

Cost of existing building = $720,000

Book value of existing building = $360,000 ($720,000 * 10/20)

Transactions and adjustments during 2011:

a. Repairs and Maintenance Expenses $7,000 Cash $7,000

b. Repairs and Maintenance Expenses $122,000 Cash $122,000

c. Building extension $230,000 Cash $230,000

d. Depreciation Expense on existing building = $36,000 ($720,000/20).

e. Accumulated Depreciation on Building, Dec. 31, 2011 = $396,000 ($360,000 + $36,000)