Oki Company pays $315,350 for equipment expected to last four years and have a $30,000 salvage value. Prepare journal entries to record the following costs related to the equipment. During the second year of the equipment’s life, $14,500 cash is paid for a new component expected to increase the equipment’s productivity by 10% a year. During the third year, $3,625 cash is paid for normal repairs necessary to keep the equipment in good working order. During the fourth year, $7,450 is paid for repairs expected to increase the useful life of the equipment from four to five years.

Equipment $14,500 (debit)

Cash $14,500 (credit)

Being Purchase of New Major Component.

Repairs Expense $3,625 (debit)

Cash $3,625 (credit)

Being cost of repairs incurred

Equipment $7,450 (debit)

Cash $7,450 (credit)

Being Cost of Major Repairs

Explanation:

The question test knowledge on the ability to identify Costs that need to be Capitalized to a Property, Plant and Equipment Item and those costs that are considers as Revenue Expenditures.

Costs that Increase the Income earning ability of the assets are Capitalized into the Asset account. Such costs Include Major Repairs and New Components.

Costs that are incurred in the course of running a business to maintain day to day operation of the assets are Revenue expenditures are recorded as expenses in the Income Statement.