You have obtained your first professional accounting position as a staff account

Question

You have obtained your first professional accounting position as a staff accountant at Southwest Airlines. Your supervisor informs you that the company is about to engage in a major renovation of its fleet of planes. This will include adding newer, more comfortable seats and installing TV’s on the back of seats so that the company can compete better with Jet Blue. Your boss would like you to research the appropriate accounting for these renovations. Write a brief memo to your boss responding to his request citing the appropriate codification references in your memo.

Explanation / Answer

Proper accounting is contingent on the ownership aspect of the airplanes in question, whether they are owned by Southwest Airlines or leased. if the former, they should be capitalized in addition to the planes and depreciated over the useful life of the plane. If it is an operating-type lease, then it can be either capitalized or expensed. If it materially affects the life-time of the good then it should be capitalized otherwise it will be expensed similarly to an executory cost.

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