A building, with a cost of 22 mil. lei, is depreciated over 20 years via the straight-line method (a residual value of 2 mil. lei is estimated). The following events occur :
(a) during the 3rd year of use its internal walls are repainted, the overall cost is 80,000 lei (no VAT added)
(b) on December 31st, 20X9, a general repair and full renovation project ended, the overall cost of it being 1.19 million lei (VAT of 19% included).
Requirements: Which subsequent costs should be capitalised and what effect would this have on the annual financial statements?
The painting process by the end of the third year of use does not qualify for cost capitalisation, it is just a maintenance cost and is to be expensed. However, the renovation cost does qualify for capitalisation because it provided additional benefits, for e.g., prolonging the useful life of the building. Therefore, the amount of 1 mil. lei (VAT excluded) increases the value of the non-current asset and its depreciable amount (depreciation shall be reassessed, based on the new value).
- Journal entries for wall painting:
80,000 lei Other operating expenses = Accounts payable 80,000 lei
- Journal entry for consolidation cost:
1,190,000 lei % = Accounts payable for non-current assets 1,190,000 lei
1,000,000 lei Buildings
190,000 lei VAT deductible