Repairs & Maintance

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  • #2889240 Reply

    See the question below. What I dont understand is why someone would want to expense instead of capitalize?

    19-17b. An auditor's principal objective in analyzing repairs and maintenance expense
    accounts is to

    (1) determine that all obsolete property, plant, and equipment assets were written off
    before the year-end.
    (2) verify that all recorded property, plant, and equipment assets actually exist.
    (3) discover expenditures that were expensed but should have been capitalized.
    (4) identify property, plant, and equipment assets that cannot be repaired and should
    be written off.

    Answer is (3)

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    Make more money do less work
    #2889270 Reply

    It's used as an income smoothing/earnings management technique. These are often expenditures with somewhat discretionary timing – management can decide what year to do it in, which makes them more prone to manipulation for earnings management. Exceeding profit projections for the year but worried there will be downswings coming? Make some big expenditures that will be utilized for years but expense them now (when you can absorb the higher expense) and you don't have to match any of the the expense to the revenue in leaner years to come.

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    Are we there yet?
    #2889342 Reply

    Very well explained. I remember I had the same question.. I was thinking it's better to capitalize because it will make the B.S. looks better and overstate the N.I.

    FAR - 73, 78 (WileyCPAexcel 3,000+ MCQs, 50 SIMs)
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    "Of course it’s hard. It’s supposed to be hard. If it was easy, everyone would do it.

    #2889693 Reply

    From a tax standpoint, everyone wants to expense everything immediately to reduce current year taxable income.
    Explaining to a client they can't write off that 100k improvement to a rental property in the current year, and then explaining depreciation, and that ever though they just dropped 100k they still “have a tax profit and owe tax” is always so much fun!

    Memento Mori - Kingston NY CPA & EA (SUNY Albany 2002)

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