Extraordinary Repairs

What Are Extraordinary Repairs?

Extraordinary repairs, in the field of accounting, are broad repairs made to a asset, like property or equipment (PP&E), which prolongs its useful life and increases its book value.

This might be set as opposed to ordinary repairs, which are viewed as normal and preventive maintenance. Ordinary repairs are expensed quickly instead of being capitalized.

Grasping Extraordinary Repairs

Extraordinary repairs are capitalized, and that means the repair cost increases the book value of the fixed asset that was worked on because of the repair. The extraordinary repair cost might be added to the original fixed asset or it very well may be distinguished as a separate fixed asset thing straightforwardly under the original, to keep clean accounting records.

Fixed assets are then consolidated and introduced in the long-term asset section on a company's balance sheet. Recording extraordinary repairs thusly likewise increases the periodic depreciation expense recorded over the reconsidered excess life of the asset. The depreciation expense flows through to the company's income statement.

Capabilities for Extraordinary Repairs

In the event that the amount spent on an extraordinary repair is immaterial, it is more efficient according to an accounting viewpoint to charge the cost to expense as incurred, as opposed to adjusting the book value of the fixed asset. Essentially, on the off chance that a machine's expected life is just prolonged by a couple of months, it is more prudent to expense the repair cost.

As per generally agreed accounting principles (GAAP), extraordinary repairs are generally capitalized on the off chance that the helpful life is increased by over a year.

Extraordinary Repairs versus Ordinary Repairs

The accounting treatment of extraordinary and ordinary repairs is unique. Ordinary repairs are basically recorded as expenses in the current accounting period, leaving the book value of the connected fixed asset unchanged. Expenses are costs recorded on a company's income statement in the period in which the cost is incurred.

Introducing another engine in a truck would be an extraordinary repair, while getting an oil change would be an ordinary repair.

Illustration of Extraordinary Repairs

Accept that ABC Boating Company possesses several harbors and many boats. To sufficiently keep up with the harbors and give safe storage to its boats, ABC must regularly supplant spoiled or harmed boards on the harbors. These costs are incurred as part of general maintenance and don't broaden the life of the dock by any stretch of the imagination. 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.

Then again, expect that ABC Boating Company has chosen to redesign one of its lines of boats. Twenty of the boats' more established engines are swapped out for new, more remarkable engines. The new engines are anticipated to expand the valuable life of the boat for five extra years. ABC burns through $20,000 on each boat, for a total of $400,000, which is a material cost to the company.

This qualifies as an extraordinary repair. Because 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 promptly in the current accounting period.

Say the line of boats originally had five years staying on their helpful life. With the new engines that broaden that life by five years, the boats presently have a leftover helpful life of 10 years. The increase in value to the fixed asset will add an extra $40,000 ($400,000 increase in value/10 years) to every year's depreciation expense. This extra cost will flow through to the income statement throughout those 10 years.

Features

• Extraordinary repairs must broaden the helpful life of the asset past one year, and the value of the repair must be materially critical.
• Extraordinary repairs are capitalized expenses that increase the future expostulation of an asset over the remainder of its helpful life.
• Ordinary repairs, then again, are expensed right away and reported on the income statement in the current period.