Question: Assume that a cost of $1,257,500 is assigned to the building above. Assume further that it has an
expected life of twenty years and straight-line depreciation is applied with no residual value. Thus, after eight
years, accumulated depreciation is $503,000 ($1,257,500 × 8 years/20 years). At that point, the company spends
an additional $150,000 on the building. Should an expenditure associated with property and equipment that is
already in use be capitalized (added to the asset account) or expensed immediately?
Answer: The answer to this question depends on the impact that this work has on the building. In many cases,
additional money is spent simply to keep the asset operating with no change in expected life or improvement in
future productivity. Such costs are recorded as maintenance expense if they were anticipated or repair expense if
unexpected. For example, changing the oil in a truck at regular intervals is a maintenance expense whereas fixing
a dent from an accident is a repair expense. This distinction has no impact on reported income.
However, if the $150,000 cost increases the future operating capacity of the asset, the amount should be
capitalized. The building might have been made bigger, more efficient, more productive, or less expensive to
operate. If the asset has actually been improved by the cost incurred, historical cost is raised.