Exercise 8-18A Effect of revenue expenditures versus capital expenditures on financial statements LO 8-8

On January 1, Year 1, Webb 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 a maintenance expense in the past. Management is considering whether to capitalize this years $26,830 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 Webb would recognize in Year 1 and Year 2 if the cost were capitalized in the Cranes account. b. Determine the amount of expense Webb would recognize in Year 1 and Year 2 if the cost were recognized as maintenance expense. c. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were capitalized and expensed through depreciation charges. d. Determine the effect of the overhaul on cash flow from operating activities for Year 1 and Year 2 if the cost were recognized as maintenance expense.

Year 1 Year 2 a. Depreciation expense b. Maintenance expense c. Operating activities d. Operating activities