Recording of Cost to Maintain or Repair Asset

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.