Question

Cunningham Bakeries needs new racks and a refrigeration unit in its existing ... unit in its existing delivery van to begin delivering ice cream cakes. It paid the total cost of the asset modification, $15,000, in cash. In addition, Cunningham took its delivery van in for service and paid $60 cash for an oil change and tire rotation.

what is the journal for the asset modification ?

Answer 1

Journal entry for asset modification:

Delivery van - Asset Debit $15000

Cash Credit $15000

Journal entry for oil change and tire rotation:

Repair and maintenance Debit $ 60

Cash Credit $ 60

Explanation:

Any expenditure which increases the normal capacity and life of asset over and above its standard capacity and life then such expenditure is capitalised. Cunningham Bakeries improve the efficiency of existing asset by asset modification, hence asset modification expense increase the life of asset and it should be capitalised.

Oil change and tire rotation does not increase the normal life of asset, so it is considered as revenue expenditure.