AC 210 Lecture Notes - Lecture 46: Forklift, General Ledger, Income Statement
5 Jun 2018
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Repairs and Improvements
Expenses relating to depreciable assets fall into two broad categories: ordinary
expenditures and capital expenditures. Ordinary expendituresinclude normal repairs,
maintenance, and upkeep. The costs associated with these items are considered
normal operating expenses, and they are recorded by debiting expense accounts and
crediting cash or another appropriate account. Capital expenditures increase an
asset's usefulness or service life, and they are recognized by increasing the asset's net
book value.
There are two ways to increase an asset's net book value: the asset account can be
debited, thus increasing the recognized cost of the asset, or the asset's corresponding
accumulated depreciation account can be debited, thus decreasing the amount of
depreciation previously allocated to the asset. If the capital expenditure serves primarily
to increase the asset's usefulness or value, the asset account should be debited. On the
other hand, if the capital expenditure serves primarily to increase the asset's useful life
or salvage value, the accumulated depreciation account should be debited. Such
judgments are not always clear cut, and discussions about the best way to record
capital expenditures are usually covered in more advanced accounting courses.
Nevertheless, you should be prepared to see capital expenditures recorded in either the
asset account or the asset's accumulated depreciation account, and you should
recognize that the effect on the asset's net book value is the same either way. Consider
how a $10,000 capital expenditure changes the truck's net book value.
Before
Capital
Expenditure
After $10,000
Capital
Expenditure
Asset
Account
Debited
Accumulated
Depreciation
Debited
Cost
$90,000
100,000
90,000
Accumulated
Depreciation
(64,000)
(64,000)
(54,000)
Net Book
Value
$26,000
36,000
36,000
When capital expenditures are made, the revised net book value must be used to
calculate depreciation expense in subsequent accounting periods.
Disposition of Depreciable Assets
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Depreciable assets are disposed of by retiring, selling, or exchanging them. When a
depreciable asset is disposed of, an entry is made to recognize any unrecorded
depreciation expense up to the date of the disposition, and then the asset's cost and
accumulated depreciation are removed from the respective general ledger accounts.
Any recognized losses or gains associated with the disposition are recorded in a
separate account and appear in the portion of the income statement named other
income/(expense), net.
Music World Partial Income Statement For the Year Ended June 30, 20X3
Operating Income
Other lncome/(Expense),
Net
245,500
Interest Income
$ 7,500
Gain on Sale of
Equipment
1,500
Interest Expense
(18,000)
Other
lncome/(Expense), Net
(9,000)
Net Income
$236,500
Retirement of depreciable assets. Retirement occurs when a depreciable asset is
taken out of service and no salvage value is received for the asset. In addition to
removing the asset's cost and accumulated depreciation from the books, the asset's net
book value, if it has any, is written off as a loss.
Suppose the $90,000 truck reaches the end of its useful life with a net book value of
$10,000, but the truck is in such poor condition that a salvage yard simply agrees to
haul it away for free. The entry to record the truck's retirement debits accumulated
depreciation‐vehicles for $80,000, debits loss on retirement of vehicles for $10,000, and
credits vehicles for $90,000. The loss is considered an expense and decreases net
income.
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