90.2K

Verified Solution

Link Copied!

When a company has post-acquisition expenditures related to Property, Plant, and Equipment it must determine whether the amount should be expensed as an ordinary repair or capitalized as a major repair, addition, or betterment. This requires considering the nature of the expenditure and the use of judgment. Many companies use a threshold amount. Any expenditure below the threshold is expensed. Items over the threshold are examined and a decision is made about whether to expense or capitalize the item. This approach is justified by both materiality and considering costs and benefits. For example, a company with $94 million in net property, plant, and equipment and $250 million of operating expenses would not consider a $100 repair as material. Plus, if the company had to spend thousands of dollars examining every repair expenditure, the costs of doing the analysis could easily outweigh the benefits. SouthEast Equipment has a large number of machines and equipment that are available for rent on a short-term basis to their customers. Due to the large number of machines the company has a significant number of repair transactions each year. Towards the end of 2022, the corporate controller decided to examine the company's capitalization process and to examine whether the threshold should be adjusted. The current policy was set when the company was much smaller and with the significant growth over the past few years she suspected that an adjustment might be needed. The current policy is as follows: During the period all repairs that are expected to cost more than $10,000 are carefully reviewed by the operations team and the purchasing group. During the review it is determined whether the item is an ordinary repair or should be capitalized. The remaining repair items (repairs below $10,000 ) are recorded initially in the Repairs Suspense account. At the end of each period all of the entries in the Repairs Suspense account are examined by the accounting staff. To facilitate the examination process, a file is created listing all of the transactions for the period. As a first step, the file is coded based on the threshold amount. Any transaction below the threshold amount will be treated as an ordinary repair and will be expensed. For any item above the threshold amount, an accounting clerk retrieves the documentation describing the nature of the repair. Using the documentation, they decide whether the item should be expensed as an ordinary repair or capitalized as a major repair. The current threshold amount for this step in the review is $750. A second threshold is used to determine when the work of the accounting clerk should be reviewed by the accounting manager. Any item above this threshold is reviewed by the manager to ensure that the treatment given by the accounting clerk is correct. In some cases, the accounting manager may need to consult with the operating employees including facility managers and staff to discuss the item for a final determination. Changes by the accounting manager are not common, but do occur from time to time based on their judgment and additional information collected. The current threshold amount for the second review is \$5,000. After the review is complete, a journal entry is prepared to close the Repairs Suspense account transferring the balance into the Repairs Expense and the appropriate Property, Plant, and Equipment accounts. The full hourly cost (salary, benefits, occupancy, etc.) for the accounting clerk is $35.00 per hour and $61.00 per hour for the accounting manager. Each review by the accounting clerk takes on average 15 minutes per transaction. The accounting manager takes between 15-30 minutes for their review, with an average time of 25 minutes per review. Instructions Project Objective - To examine the cost and benefit of a change in accounting policy related to repairs. To assist in this project, a file has been created that contains the result of last year's review. The file name is Repair_Items_2021.xlsX. Last year the company had over 22,000 transactions in the Repair Suspense account. The file contains the following fields: Click here to view Repair_Items_2021.xlsx (a) First, using the file from last year, calculate (1) the total time (measured in hours per year) and the total cost incurred for the clerk reviews, (2) the total time (measured in hours per year) and the total cost incurred for the manager review, and (3) the total dollar amount of transactions that were changed based on the manager reviewing the decisions made by the clerks. Fill in the table below with your answers for (1) and (2): (Round answers to 2 decimal places, e.g. 25.55.) (3) Total cost for both the clerks and manager (current thresholds): $ Total dollar value of transactions reviewed and changed by the manager: $

Answer & Explanation Solved by verified expert

See Answer