A city government adds street lights within its boundaries at a total cost of $3

Question

A city government adds street lights within its boundaries at a total cost of $300,000. The lights should burn for at least 10 years but can last significantly longer if maintained properly. The city sets up a system to monitor these lights with the goal that 97 percent will be working at any one time. During the year, the city spends $48,000 to clean and repair the lights so that they are working according to the specified conditions. However, it spends another $78,000 to construct lights for several new streets in the city. Prepare the entries assuming infrastructure assets are capitalized with depreciation recorded. Prepare the entries assuming infrastructure assets capitalized with government using the modified approach.

Explanation / Answer

a) Entries assuming infrastructure assets are capitalized under depreciation method For initial addittion Assets A/c                            Dr $ 3,00,000             To Vendor A/c                       $3,00,000 (Being amount of $ 3,00,000 invested for street lights) For further additons Assets A/c                            Dr $ 78,000             To Vendor A/c                       $78,000 (Being amount of $ 78,000 invested for street lights in new streets) Repairs & Cleaning Repairs & Maintenance A/c             Dr    $ 48,000 To Vendor A/c                                $ 48,000 (Being amount incurred toward maintenance of assets has been charged off) Depreciation Depreciation A/c                            Dr $37,800 To Provision for Depreication A/c $37,800 Depreciation per year Total cost of the Assets = $ 3,00,000 + $ 78,000 = $ 378,000 Estimated useful life = 10 years Depreciation per year = $ 37,800/- b) Entries assuming infrastructure assets are capitalized under modified approach All the entries will be remained same, except the computation of depreciation Under the modified approach depreciation will be charged after the expected useful life of the assets Therefore, depreciation will be charged from the 11th year till it will useful.

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