Question

Maria is the manager of a facility that makes small appliances. The factory’s management has decided to rearrange and reinstall all of the facility’s manufacturing equipment in order to promote a faster, more efficient workflow. Maria knows the total cost for the rearrangement and reinstallation, but that is all the information she currently has available. Given this situation, which of the following statements is accurate?

• A :

  Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is immaterial in amount.

• B :

  Maria should capitalize the rearrangement and reinstallation cost as an asset to be amortized over future periods expected to benefit, but only if this cost is material in amount.

• C :

  Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine the machinery’s original installation cost.

• D :

  Maria should immediately expense the rearrangement and reinstallation cost, but only if she is able to determine both the machinery’s original installation cost and its accumulated depreciation to date.

Answer 1

Answer is B

Costs should be capitalized if they increase the future benefits which are expected to be received and amount incurred is material.   Hence in the given case rearranging and reinstalling all of the factory manufacturing equipment in order to promote a faster, more efficient workflow will definitely increase the future benefits to be received from the expenditure. Hence this amount will be capital expenditure and needs to be capitalised. The depreciation should be charged over the useful life of the asset. The entire expenditure cannot be charged to Income statement as expense since it will be against the principle of accounting of capital expenditure