The repairs extend its useful life for 5 years beyond the 20 years originally estimated.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Martinez Company owns a building that appears on its prior year-end balance sheet at its original $572,000 cost less $429,000
1. Determine the building’s age (plant asset age) as of the prior year-end balance sheet date.
2. Prepare the entry to record the cost of the structural repairs that are paid in cash.
3. Determine the book value of the building immediately after the repairs are recorded.
4. Prepare the entry to record the current calendar year's depreciation.
Determine the building’s age (plant asset age) as of the prior year-end balance sheet date.
- Required 1
Determine the building’s age (plant asset age) as of the prior year-end balance sheet date.
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- Record the structural cost of $68,350 paid in cash.
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- Required 3
| No | Transaction | General Journal | Debit | Credit |
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Determine the book value of the building immediately after the repairs are recorded.
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- Record the year-end
adjusting entry for the depreciation expense of the building.
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According to IAS -16 ( Property , Plant and equipment )
As per IAS -16 an item of Property, Plant and Equipment has to be recognized if it satisfied the below conditions
a) There are future economic benefits to the entity
b) The cost can be measured reliably
here we can see that the repairs have increased the life of the building thereby increasing the economic benefits to the entity. Hence it should be capitalised as per IAS -16
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