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    Accounting for Machine improvements and exchanges

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    1. An improvement made to a machine increased its fair market value and its production capacity by 25% without extending the machine's useful life.
    The cost of the improvement should be ...... (expensed, debited to accumulated depreciation, capitalized in the machine account, allocated between accumulated depreciation and the machine account)

    2. Company exchanges one plant asset for a similar plant asset and gives cash in the exchange. The exchange is not expected to cause a material change in the future cash flows for either entity.
    If a gain on the disposal of the old asset is indicated, the gain will ..... (be reported in the Other Revenues and Gains section of the income statement, effectively reduce the amount to be recorded as the cost of the new asset, effectively increase the amount to be recorded as the cost of the new asset, be credited directly to the owner's capital account)

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    Solution Preview

    1. The cost of the improvement should be capitalized in the machine account. It may not extend the life of the asset but the amount of the improvement is still ...

    Solution Summary

    The solution explains the concepts involved with capital improvements to a machine without extending its life. Part 2 of the problem discusses how to record a tax deferred trade of a capital asset when no gain is currently reportable.