Question

For each of the items below, prepare the appropriate entry.

1. A motor in one of Excel’s trucks was overhauled at a cost of $4,000. Excel expects this overhaul will make the truck last longer, i.e., the truck’s useful life will be extended.

2. James, a maintenance worker at Excel, spent the entire week unloading and setting up a new machine in Excel’s factory.  James’ earned $1,500 that week, however, James will not be paid until the following week.  (Do not worry about any withholdings from James’ pay.)

3. Excel incurred and paid $1,600 for ordinary repairs on one of its machines.

4. Excel incurred and paid $10,000 for adjustments to one of its machines. The adjustments will increase the efficiency of the machine, i.e., the machine will be able to produce the same quantity of inventory items at a lower production cost.

Answer 1

a.
Cost of improving an asset can be capitalized if the improvement extends the useful
life of the asset,improves efficiency or provides some other improvement in economic
benefits to the company
Since,the useful life of the truck would be extended due the overhaul,the cost would be
capitalized and will be amortized over the remaining useful life of the truck
	Account Title				Debit	Credit
	Asset - Truck				$4,000
	Accounts payable					$4,000
b.
Salary payable to James for the week in which he spent the entrire week in unloading
and setting new machinery would be capitalized alongwith the cost of new machinery
as his salary would part of the installation cost of the machinery.
	Account Title				Debit	Credit
	Salary - James				$1,500
	Salaries payable					$1,500
	(to book salary payable)
	Account Title				Debit	Credit
	Asset - New machinery				$1,500
	Salary - James					$1,500
	(to capitalize James' Salary with the New Machine)
c.
Ordinary repairs are expenses and would charged to the relevant expense accounts
	Account Title				Debit	Credit
	Repairs & maintenance - Machinery				$1,600
	Cash					$1,600
d.
Cost of improving an asset can be capitalized if the improvement extends the useful
life of the asset,improves efficiency or provides some other improvement in economic
benefits to the company
Since these adjustments will improve the efficiency of the machine, we would capitalize
these adjustment costs to be amortized over the useful life of the asset
	Account Title				Debit	Credit
	Asset - Machinery				$10,000
	Cash					$10,000