Chapter 8, Problem 8.2P

Analyzing the Effects of Repairs, an Addition, and Depreciation (AP8-2)

LO8-2, 8-3 A recent annual report for FedEx included the following note:

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PROPERTY AND EQUIPMENT. Expenditures for major additions, improvements and flight equipment modifications are capitalized when such costs are determined to extend the useful life of the asset or are part of the cost of acquiring the asset. Expenditures for equipment overhaul costs of engines or airframes prior to their operational use are capitalized as part of the cost of such assets as they are costs required to ready the asset for its intended use. Maintenance and repairs costs are charged to expense as incurred....

Assume that FedEx made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for delivery trucks that serve the Denver area. The existing building originally cost $950,000, and by the end of last year, it was half depreciated based on use of the straight-line method, a 20-year estimated useful life, and no residual value. During the current year, the following expenditures related to the building were made:

1. 1. Ordinary repairs and maintenance expenditures for the year. $7,000 cash.
2. 2. Extensive and major repairs to the roof of the building. $ 122.000 cash. These repairs were completed at the end of the current year.
3. 3. The new wing was completed on December 31 of the current year at a cash cost of $230,000.

Required:

1. Applying the policies of FedEx, complete the following, indicating the effects for the preceding expenditures for the current year. If there is no effect on an account, write NE on the line.

	Building	Accumulated Depreciation	Depreciation Expense	Repairs Expense	Cash
Balance January 1	$950,000	$475,000
Depreciation		____	____		____
Balance prior to expenditures	950,000	____	____
Expenditure (a)	____	____	____	____	____
Expenditure (b)	____	____	____	____	____
Expenditure (c)	____	____	____	____	____
Balance December 31	____	____	____	____

2. What was the net book value of the building on December 31 of the current year?

3. Explain the effect of depreciation on cash flows.