A recent annual report for FedEx included the following note:

Property and Equipment

Expenditures for major additions, improvements, flight equipment modifications and certain equipment overhaul costs are capitalized when such costs are determined to extend the useful life of the asset. Maintenance and repairs are charged to expense as incurred.

Assume that FedEx made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for delivery trucks that serve the Denver area. The existing building originally cost $720,000, and by the end of 2010 (10 years), it was half depreciated on the basis of a 20-year estimated useful life and no residual value. Assume straight-line depreciation was used. During 2011, the following expenditures related to the building were made:

a. Ordinary repairs and maintenance expenditures for the year, $7,000 cash.

b. Extensive and major repairs to the roof of the building, $122,000 cash. These repairs were completed on December 31, 2011.

c. The new wing was completed on December 31, 2011, at a cash cost of $230,000.

Required:

1. Applying the policies of FedEx, complete the following, indicating the effects for the preceding expenditures. If there is no effect on an account, write NE on the line:

2. What was the book value of the building on December 31, 2011?
3. Explain the effect of depreciation on cashflows.

Transcribed Image Text:

Accumulated Depreciation Repairs Building DrpreciationpssseCash $720,000 $360,000 Balance January 1, 2011 Depreciation for 2011 Balance prior to expenditures Expenditure (a) Expenditure (b) Expenditure (c) Balance December 3, 20 720,000