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Q1) Merton Company bought a building at cost of $364,000 on January 1, 2006. Merton estimated that building's life would be 25 years and residual value at the end of 25 years would be $14,000.

On January 1, 2007, company made various expenditures related to building. Entire building was painted and floors were refinished at cost of $21,000. Federal agency needed Merton to install extra pollution-control devices in the building at cost of $42,000.  With new devices, Merton believed it was possible to extend life of building by additional six years. 

In 2008 Merton altered its corporate strategy dramatically. Company sold building on April 1, 2008, for $392,000 in cash and relocated all operations in another state.

Describe why cost of pollution-control equipment was not expensed in 2007. What conditions would have permitted Merton to expense equipment? If Merton has choice, would it prefer to expense or capitalize  equipment?

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  • Category:- Accounting Basics
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