Also, if the amount by which the life of the machinery is prolonged is relatively minor (such as a few months), it is also more efficient to simply charge the repair cost to expense as incurred. Instead of being expensed as a regular repair and maintenance expense, which would immediately affect the company’s net income, extraordinary repairs are capitalized. This means that the cost of these repairs is added to the asset’s carrying amount on the balance sheet and then depreciated over the remaining useful life of the asset. This spreads out the cost of the repairs over the periods that are expected to benefit from them.
- According to generally agreed accounting principles extraordinary repairs are generally capitalized if the useful life is increased by more than a year.
- Since the benefits of these repairs will extend into future periods, GAAP requires that we record this transaction as an additional asset.
- Recording extraordinary repairs in this manner also increases the periodic depreciation expense recorded over the revised remaining life of the asset.
- One of its trucks, which was initially expected to have a useful life of 10 years, is in its 5th year of operation.
Since extraordinary repairs extend the life of the asset, they are not immediately expensed on the income statement like normal repairs are in the current year. Instead, extraordinary repairs are capitalized and reported on the balance sheet as an increase in value to the asset they upgraded. Extraordinary repairs are extensive repairs to machinery, with the intent of prolonging the life of the machinery.
Ordinary repairs are simply recorded as expenses in the current accounting period, leaving the book value of the related fixed asset unchanged. Expenses are costs recorded on a company’s income statement in the period in which the cost is incurred. If the amount spent on an extraordinary repair is immaterial, it is more efficient from an accounting perspective to charge the cost to expense as incurred, rather than adjusting the fixed asset records.
What are extraordinary repairs?
The new engines are predicted to extend the useful life of the boat for an additional five years. ABC spends $20,000 on each boat, for a total of $400,000, which is a material cost to the company. The owner of this website may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
Example of Extraordinary Repairs
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What Are Extraordinary Repairs?
Sometimes these repairs are reported as a separate asset and sometimes they are reported as an addition to the existing asset. For example, if the delivery truck was on the books for $5,000 and $1,000 was paid for a transmission upgrade, the vehicle would be reported at $6,000 on the next balance sheet. Instead of just conducting minor repairs or maintenance, TruckingPro Ltd. decides to replace the entire engine.
Regular repair and maintenance costs do not significantly improve the asset or extend its useful life beyond the original estimate, whereas extraordinary repairs do. Extraordinary repairs, in accounting, are extensive repairs to property or equipment which prolong its useful life and increase its book value, in contrast to ordinary repairs which are considered normal preventive maintenance, and expensed. In order to adequately maintain the docks and provide safe storage for its boats, ABC must routinely replace rotten or damaged boards on the docks. These costs are incurred as part of general maintenance and do not extend the life of the dock at all. This would be an ordinary repair, and the accountants at ABC would record the transaction as a debit to repairs expense and a credit to the cash balance. The cost of extraordinary repairs should be included in the cost of the fixed asset that was repaired, and depreciated over the revised remaining life of the asset.
More Definitions of Extraordinary Repairs
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In this case, the cost of the new engine would be considered an extraordinary repair. Rather than being expensed immediately as a repair and maintenance cost , the $20,000 would be added to the carrying amount of the truck on the balance sheet. Then, this amount would be depreciated over the remaining useful life of the truck, spreading the cost over the periods that are expected to benefit from the new engine. As a result of this transaction, ABC’s accountants will debit (increase) their fixed asset account and credit accounts payable (AP) by $400,000. The fixed assets on the balance sheet will show this increase in value immediately in the current accounting period. It’s important to differentiate between regular repairs (expenses) and extraordinary repairs (capital expenditures).
Installing a new engine in a truck would be an extraordinary repair, while getting an oil change would be an ordinary repair. However, if the amount spent on an extraordinary repair is immaterial, it is more efficient from an accounting perspective to charge the cost to expense as incurred, rather than adjusting the fixed asset records. Similarly, if a machine’s expected life is only prolonged by a few months, it is more efficient to charge the repair cost to expenses. According to generally agreed accounting principles extraordinary repairs are generally capitalized if the useful life is increased by more than a year.