Reference no: EM132793223

Capitalizing or Expensing Costs

a. Routine maintenance and repairs on various aircraft costing €1.1 billion.

b. Air France, a subsidiary of the Air France-KLM Group, is one of the world's largest airlines. It operates a mixed fleet of Airbus and Boeing wide-bodied jets on long-haul routes and relies mainly on the Airbus A320 family of aircraft for shorter flights. Assume that Air France made the following expenditures related to these aircraft in the current year:

c. The jet engines on several of the airline's A321s received a major overhaul at a cost of €18 million. The intent of the overhaul was to improve fuel efficiency and reduce carbon emissions.

d. The avionics were replaced on the fleet of Boeing 747s. This is expected to extend the useful life of the planes by 3 years.

e. Noise abatement kits were installed on some of the older A320s in accordance with EU regulations on maximum allow- able noise levels on takeoff. The equipment and installation cost €14 million.

f. The airline painted several of its aircraft as part of a campaign to promote new routes to Asia. The painting cost €1.2 million.

g. The existing seats on several A320s were replaced with more comfortable seats costing €3.5 million.

h. New jet engines were installed on several A318s. The total cost was €42 million.

Required

Problem 1: Which of the above expenditures should be capitalized and which should be expensed? Explain your answers.