Answer
a.Additions are capitalized because they contribute to the creation of new assets.
b.Major repairs are treated like additions to a plant, improvement of the plant, or total replacement because major repairs cut across multiple periods as opposed to ordinary repairs.
c.
There are three options for dealing with improvements and replacements. The substitution approach requires that the new asset’s cost replaces the old asset’s cost. Alternatively, the new cost could be capitalized such that the old asset’s carrying amount is retained in the books. Finally, the amount could be recorded under accumulated depreciation given that the replacements run through an asset’s useful life; thus, they end up recapturing most of the depreciation the asset experienced in the past.
Work Step by Step
a.Additions are capitalized because they contribute to the creation of new assets.
b.Major repairs are treated like additions to a plant, improvement of the plant, or total replacement because major repairs cut across multiple periods as opposed to ordinary repairs.
c.
There are three options for dealing with improvements and replacements. The substitution approach requires that the new asset’s cost replaces the old asset’s cost. Alternatively, the new cost could be capitalized such that the old asset’s carrying amount is retained in the books. Finally, the amount could be recorded under accumulated depreciation given that the replacements run through an asset’s useful life; thus, they end up recapturing most of the depreciation the asset experienced in the past.
