Answer True Or False: Capital Expenditures Increase The Book Value Of The Plant Asset

Solution To The Test Or Question (T/F) With  An Example & Assumptions

The correct answer is “True”, as Capital Expenditures (CapEx) is added to the cost of Plant Assets, so the book value or written down value of plant assets are also increased.

For example, if a machinery costing $5000, having useful life of 10 years with no salvage value, are depreciated on straight line method at 10%. Then its book value for first year is calculated as shown below:

                                 

(Assuming No Additional Installment Is Made)

Book Value = Cost of Machinery - Accumulated Depreciation

Book Value = $5000 - $500 = $4500

Here:

Depreciation per year = $5000 X 10% = $500

Accumulated Depreciation = $500

If an additional installment of $1000 is made to machinery, then its cost increased to $6000 ($5000 + $1000)

Now,

Book Value = Cost of Machinery - Accumulated Depreciation

Book Value = $6000 - $600 = $5400

Here:

Depreciation per year = $6000 X 10% = $600

Accumulated Depreciation = $600

Hence the book value (written down value) of machinery has increased i.e., from $4500 to $5400 a $900 increase.