Should the overhaul expenditures be capitalized or expensed? Provide a tentative argument.
Should the overhaul expenditures be capitalized or expensed? Provide a tentative argument.
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Chapter15: Financial Statement Analysis
Section: Chapter Questions
Problem 52E: Juroe Company provided the following income statement for last year: Juroes balance sheet as of...
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Redline Publishers, Inc., produces various manuals ranging from computer software instructional booklets to manuals explaining the installation and use of large pieces of industrial equipment. At the end of 2011, the company's balances sheet reported total assets of $62 million and total liabilities of $40 million. The income statement for 2011 reported net income of $1.1 million, which represents an approximate 3% increase from the prior year. The company's effective income tax rate is 30%. Near the end of 2011, a variety of expenditures were made to overhaul the company's manufacturing equipment. None of these expenditures exceeded $750, the materiality threshold the company has set for the capitalization of any such expenditures. Even though the overhauls extended the service life of the equipment, the expenditures were expensed, not capitalized. John Henderson, the company's controller, is worried about the treatment of the overhaul expenditures. Even though no individual expenditure exceeded the $750 materiality threshold, total expenditures were $70,000.
Should the overhaul expenditures be capitalized or expensed? Provide a tentative argument.
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