For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.
(b) Replacement of a minor broken part on a machine.
(c) Expenditure that increases the useful life of an existing asset.
(d) Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
(e) Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset's salvage value.
(f) Ordinary repairs.
(g) Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine's useful life.
(h) Expenditure that increases the quality of the output of the productive asset.
The rule is that you capitalize if the expenditure extends the useful life, changes the capacity or ability of the item, changes the expected salvage value, or revises its function. In other words, if ANY one of these is true, you capitalize. A combination of more than one of these ok but is not required to meet the test.
First, the rule is given and then applied to each.