Expenditures After Acquisition – Property, plant, and equipment (PPE)

Firms often make expenditures during a fixed asset’s life. Frequently, the expenditures are for routine repairs and maintenance. Because these expenditures merely maintain the economic benefit already contained in the asset, they do not enhance the asset’s value. Accordingly, these expenditures are immediately expensed. Usually, cash is decreased and shareholders’ equity is decreased by an expense.

Some expenditures, however, do enhance an asset’s value. For example, Northwest Airlines renovated 40 of its DC-9 twin jets. The renovations included engine modifications to reduce jet noise, new seats, and new carpeting. These changes extended each jet’s life by 15 years. Other expenditures can expand an asset or make it more efficient and productive. As another example, a personal computer’s hard drive can be replaced with a larger one, and new chips can be installed that enable the computer to perform tasks more quickly. Because all of these expenditures increase an asset’s value, they should be capitalized. In other words, the asset’s recorded value should be increased. Note that a change in an asset’s book value or remaining estimated life will necessitate a change in the periodic depreciation charge.

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