Expenditures for major additions, improvements, flight equipment modifications and certain equipment overhaul costs are capitalized when such costs are determined to extend the useful life of the asset. Maintenance and repairs are charged to expense as incurred. Assume that FedEx made extensive repairs on an existing building and added a new wing. The building is a garage and repair facility for delivery trucks that serve the Denver area. The existing building originally cost $720,000, and by the end of 2010 (10 years), it was half depreciated on the basis of a 20-year estimated useful life and no residual value. Assume straight-line depreciation was used. During 2011, the following expenditures related to the building were made:

a. Ordinary repairs and maintenance expenditures for the year, $7,000 cash.
b. Extensive and major repairs to the roof of the building, $122,000 cash. These repairs were completed on December 31, 2011.
c. The new wing was completed on December 31, 2011, at a cash cost of $230,000.

Required:
a. Applying the policies of Commonwealth Delivery, complete the following, indicating the effects for the preceding expenditures. Indicate the effects positive value for increase, negative value for decrease.

Building Accumulated Depreciation Depreciation Expense Repairs Expense Cash
Balance January 1, 2011 $720,000 $360,000
Depreciation for 2011
Balance prior to expenditures 720,000
Expenditure (a)
Expenditure (b)
Expenditure (c)
Balance December 31, 2011

b. What was the book value of the building on December 31, 2011?
c. Explain the effect of depreciation on cash flows.

c. Depreciation does not have any effect on cash flows. It is a charge on the income used to record the cost of the use of the asset in the current period. It is a kind of cost allocation, whereby the cost of an asset is recorded in the periodic financial statement in recognition of the use of that asset to generate income for the period.

Explanation:

a) Data and Calculations:

Original cost of building = $720,000

Depreciated value of building = $36,000

Remaining useful life = 10 years

Repairs and maintenance expenses = $7,000

Extensive and major repairs to the building roof = $122,000

Cash cost of New wing = $230,000

Building Accumulated Depreciation Repairs Cash

Depreciation Expense Expense

Balance, January 1,

2011 $720,000 $360,000

Depreciation for 2011 36,000 $36,000

Balance prior to

expenditures 720,000

Expenditure (a) $7,000 $7,000

Expenditure (b) 122,000 122,000

Expenditure (c) 230,000 230,000

Balance December 31,

2011 $1,072,000 36,000 $36,000 $7,000 $249,000