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ACCA Applied Knowledge · Financial Accounting · Tangible non-current assets

Kento Co spent $18,000 replacing the engine of a delivery van, which extends the van's useful life by three years. Separately it spent $2,000 on routine servicing. How should these be treated?

Capitalise the $18,000 engine replacement because it extends the van's useful life and so improves future benefits, while expense the $2,000 routine servicing because it merely maintains existing performance. Capitalising servicing would overstate non-current assets and profit.

  1. ACapitalise $18,000 and expense $2,000Correct
  2. BExpense both amounts
  3. CCapitalise both amounts
  4. DExpense $18,000 and capitalise $2,000

Explanation

Expenditure that enhances future economic benefits, such as extending useful life, is capital and added to the asset. Routine servicing only maintains the existing performance level and is a revenue expense. Capitalising both would overstate assets.

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