Chapter 11 - Problem 11-2 Capitalizing vs. Expensing various costs (LO 11-2)

Fly-by-Night is an international airline company. Its fleet includes Boeing 757s, 747s, and 737s and McDonald Douglas MD-83s and MD-80s. Assume that Fly-by-Night made the following expenditures related to these aircraft in 20X1;

a) New jet engines were installed on some of the MD-80s at a cost of $25.0 million.

b) The company paid $2.0 million to paint one-eighth of the fleet with the firms new colors to create a new public image. It intends to paint the remainder of the fleet over the next seven years.

c) Routine maintenance and repairs on various aircraft cost $8.0 million.

d) Noise abatement equipment (hush kits) was installed on the fleet of 737s to meet FAA maximum allowable noise levels on takeoff. Equipment and installation cost $7.5 million.

e) The avionics systems were replaced on the MD-83s. This will allow the aircraft to be used four more years than originally expected.

f) The existing seats on all 747s were replaced with new, more comfortable seats at a cost of $.5 million.

g) The jet engines on 50% of the Boeing 737s received a major overhaul at a cost of $5.0 million. As a result the aircraft will be more fuel efficient.

REQUIRED:

1. Which of these expenditures should Fly-by-Night capitalize? Why?

2. Which of these expenditures should Fly-by-Night expense? Why?

3. How might Fly-by-Night use expenditures like these to manage its earnings?