On January 1, Year 1, Webb Construction Company overhauled fourcranes, resulting in a slight increase in the life of the cranes.Such overhauls occur regularly at two-year intervals and have beentreated as a maintenance expense in the past. Management isconsidering whether to capitalize this year’s $28,420 cash cost inthe Cranes asset account or to expense it as a maintenance expense.Assume that the cranes have a remaining useful life of two yearsand no expected salvage value. Assume straight-linedepreciation.
Required
a. Determine the amount of additional depreciationexpense Webb would recognize in Year 1 and Year 2 if the cost werecapitalized in the Cranes account.
b. Determine the amount of expense Webb wouldrecognize in Year 1 and Year 2 if the cost were recognized asmaintenance expense.
c. Determine the effect of the overhaul on cashflow from operating activities for Year 1 and Year 2 if the costwere capitalized and expensed through depreciation charges.
d. Determine the effect of the overhaul on cashflow from operating activities for Year 1 and Year 2 if the costwere recognized as maintenance expense.
