Redline Publishers, Inc. produces various manuals ranging from computer software instructional booklets tomanuals explaining the installation and use of large pieces of industrial equipment. At the end of 2018, the company’s balance sheet reported total assets of $62 million and total liabilities of $40 million. The income statementfor 2018 reported net income of $1.1 million, which represents an approximate 3% increase from the prior year.The company’s effective income tax rate is 30%.Near the end of 2018, a variety of expenditures were made to overhaul the company’s manufacturing equipment. None of these expenditures exceeded $750, the materiality threshold the company has set for the capitalization of any such expenditure. Even though the overhauls extended the service life of the equipment, theexpenditures were expensed, not capitalized.John Henderson, the company’s controller, is worried about the treatment of the overhaul expenditures. Eventhough no individual expenditure exceeded the $750 materiality threshold, total expenditures were $70,000.Required:Should the overhaul expenditures be capitalized or expensed?
Redline Publishers, Inc. produces various manuals ranging from computer software instructional booklets to
manuals explaining the installation and use of large pieces of industrial equipment. At the end of 2018, the company’s balance sheet reported total assets of $62 million and total liabilities of $40 million. The income statement
for 2018 reported net income of $1.1 million, which represents an approximate 3% increase from the prior year.
The company’s effective income tax rate is 30%.
Near the end of 2018, a variety of expenditures were made to overhaul the company’s manufacturing equipment. None of these expenditures exceeded $750, the materiality threshold the company has set for the capitalization of any such expenditure. Even though the overhauls extended the service life of the equipment, the
expenditures were expensed, not capitalized.
John Henderson, the company’s controller, is worried about the treatment of the overhaul expenditures. Even
though no individual expenditure exceeded the $750 materiality threshold, total expenditures were $70,000.
Required:
Should the overhaul expenditures be capitalized or expensed?
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