Question

A recent annual report for Swifty Air Cargo Company states the following :

Property, Plant and Equipment

Expenditures for major additions, improvements, flight equipment modifications, and specific equipment overhaul costs are capitalized when such costs are determined to extend the useful life of the asset or are part of acquiring the asset. Maintenance and repairs are charged to expenses are incurred.

Assume that Shifty made extensive repairs on an existing building and added a new section. The building is a garage and re[air facility for delivery trucks that served the local area. The existing building originally cost $820,000, and by the end of 2016, it was half depreciated on the basis of a useful life of 20 years and no residual value. Assume straight-line depreciation was used. During 2017, the following expenditures related to the building were made:

a. Ordinary repairs and maintenance expenditures for the year, $17,000 paid in cash.

b. Extensive and major repairs to the roof of the building, $120,000 paid in cash. These repairs were completed on December 31, 2017.

c. The new section, completed on December 31,2017, at a cost of $230,000 paid in cash, has an estimated useful life of nine years and no residual value.

Required:

1. Applying the policies of Swifty, complete the following schedule , indicating the effects of the preceding expenditures. If there is no effect on an account, write N on the line (amounts in thousands):

	Building	Accumulate Depreciation	Depreciation Expense	Repairs Expense	Cash
Balance January 1, 2017	$820,000	$410,000
Depreciation for 2017		-	-		-
Balance prior to expenditures	820,000	-	-
Expenditure a	-	-	-	-	-
Expenditure b	-	-	-	-	-
Expenditure c	-	-	-	-	-
Balance December 31, 2017	-	-	-	-	-

[ (-) indicates the spaces required to complete the table.

2. What was the carrying amount of the building at December 31,2017?

3. Compute the depreciation expense for 2018, assuming no additional capital expenditures on this building in 2018.

4. Explain the effect of depreciation on cash flows.

Answer 1

1	Particulars	Building	Accumulated Depreciation	Depreciation Expense	Repair Expense	Cash
	Balance January 1, 2017	820,000	410,000	-	-	-
	Depreciation for 2017	N	41,000	41,000	N	x
	Balance prior to expenditure 820,000	820,000	451,000	41,000	-	-
	Expenditure a -Ordinary Repairs and Maintenance	N	N	N	17,000	(17,000)
	Expenditure b - Extensive and major repairs to the roof of the building - assumed not to extend to the life of the building	N	N	N	120,000	(120,000)
	Expenditure c - new section, completed on December 31,2017	230,000	N	N	N	(230,000)
	Balance December 31, 2017	1,050,000	451,000	41,000	137,000	(367,000)

2	Carrying amount of Building would be $ 1,050,000 before depreciation.

3	Depreciation Expense for 2018	Amount ($)
	Original Building having original life of 20 years	41,000
	new section, completed on December 31,2017 having useful life of 9 years	25,556
	Total	66,556

4	Depreciation is a Non Cash expense. Hence there shall be no impact on the cash flows.