How to account for repairs to factory equipment

When you pay for a repair to factory equipment, there are two ways to account for the repair, which are based upon the effect of the repair on the equipment.

If the repair merely returns the equipment to its normal operating condition (which is the case most of the time), charge the cost of the repair to factory overhead. Then, at the end of the accounting period, all of the factory overhead costs are allocated to the units produced in that period. The net result is that some of the units are still in inventory at the end of the period, and so their cost will be reported as an asset, and will appear on the balance sheet. Or, if the units were sold during the period, their cost will appear in the cost of goods sold on the balance sheet.

In a few rare cases, a repair will prolong the useful life of factory equipment. If so, capitalize the cost of the repair and depreciate it over the life of the equipment. However, only capitalize the repair cost if the amount of the expenditure is equal to or greater than the company's capitalization limit. If not, charge it to expense as incurred. The capitalization limit is imposed to keep paltry expenditures from being tracked over a long period of time. The capitalization of repair costs is unusual, and should be cleared in advance with the company's auditors to prevent disputes over the classification of these costs during the annual audit.

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