On August 1, 2020, a copper mining company acquired and installed a new rock crusher for $25,000,000. The crusher is used in the mine to aid in the excavation of ore. At the time of installation, management estimates that the crusher will be used for 8 years, help to mine 3 million tons of ore, and have a residual value of $1,000,000. The company has a December 31 fiscal year end.

The mines actual production through 2022 was as follows:

Year Tons of ore mined

2020 150,000

2021 400,000

2022 350,000

1. [SUBSEQUENT EXPENDITURES] Assume that in 2025 the mining company incurs $400,000 of costs to repair the rock crusher. The repairs enable continued normal operation of the crusher but do not extend its useful life. Should these costs be expensed in 2025 or capitalized? Why?

Response:

Next assume that in 2026 the mining company incurs $800,000 of costs to replace key crushing components. These replacements improve the efficiency of the crusher (allowing the company to move ore more quickly) and extend its useful life by 2 additional years. Should these costs be expensed in 2026 or capitalized? Why? Explain how efficiency improvements and useful life extensions inform the decision to capitalize or expense an expenditure.

Response: