On January 1, 2013, Kory Construction Company overhauled four cranes resulting in a slight increase in the

Question:

On January 1, 2013, Kory Construction Company overhauled four cranes resulting in a slight increase in the life of the cranes. Such overhauls occur regularly at two-year intervals and have been treated as maintenance expense in the past. Management is considering whether to capitalize this year’s $25,000 cash cost in the Cranes asset account or to expense it as a maintenance expense. Assume that the cranes have a remaining useful life of two years and no expected salvage value. Assume straight-line depreciation.

Required

a. Determine the amount of additional depreciation expense Kory would recognize in 2013 and 2014 if the cost were capitalized in the Cranes account.

b. Determine the amount of expense Kory would recognize in 2013 and 2014 if the cost were recognized as maintenance expense.

c. Determine the effect of the overhaul on cash flow from operating activities for 2013 and 2014 if the cost were capitalized and expensed through depreciation charges.

d. Determine the effect of the overhaul on cash flow from operating activities for 2013 and 2014 if the cost were recognized as maintenance expense.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...