By law,a fleet of aircraft must be subject to a major overhaul every 5 years as part of its scheduled maintenance program.Which of the following statements is correct?
A) An accrual should be made in each of the 5 years preceding the overhaul.
B) The costs of the overhaul should be expensed as incurred.
C) The cost of the overhaul should be deferred and amortized.
D) The estimated cost of the overhaul should be disclosed as part of a continuity schedule in the notes to the financial statements.

Question

Quizplus · Accepted Answer

The cost of the overhaul should be deferred and amortized over the 5-year period leading up to the overhaul, in order to match the expense with the benefits received over that period. This is consistent with the matching principle of accounting. Therefore, option A is incorrect because accruals should not be made in each of the 5 years preceding the overhaul. Option B is incorrect because the costs should not be expensed as incurred, but rather should be deferred and amortized. Option D is incorrect because a continuity schedule is not necessary for this situation, as the estimated cost of the overhaul should be included in the regular financial statements.

By Law,a Fleet of Aircraft Must Be Subject to a Major