Question

The original capacity of the equipment is 10,000 units per year. After paying $2,500 to replace an important part, the company increases the capacity of equipment to 12,000 units per year. How does the company deal with the $2,500 expenditures

Answer 1

The firm must increase the value of the equipment account by $2,500.

Step-by-step explanation:

In this case, the repair expense must capitalize the asset account and not be considered an expense, instead it should be considered an additional investment. The $2,500 should be depreciated along with the normal depreciation of the equipment since it increased the productive capacity significantly.