8. Aircraft Overhaul Costs Skywing Inc. is a small, domestic passenger airline w

Question

8. Aircraft Overhaul Costs Skywing Inc. is a small, domestic passenger airline with a eet of several dozen jet airplanes. Federal regulations require the replacement of certain structural components of the aircraft at xed intervals. Until recently, Skywing’s policy has been to immediately expense all overhaul costs as incurred. The CFO of Skywing says, ‘‘These are some major overhaul costs we’re incurring. Is there any way we can capitalize overhaul costs on our eet?’’ Prepare a short memo to answer the CFO’s question.

Explanation / Answer

We've used project systems to capitalise costs say for equipment. Spare parts are not capitalised routinely, because the original part that it woudl replace is already capitalised and therefore would need to be taken out of the asset before the spare part can be capitalised. There is not much gain apart from having the exact value jn the asset when the spare part is used.

However, if it's an expensive spare part item, then it can be capitalised as an excpetion with its description plus "spare part". The problem is that it should normally not be capitalised as that requires it to be "in service" or operational.  

The best solution is really to keep it in inventory until it is used and then it should be posted to maintenance expense - and the original asset left untouched.

Hope this helps

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