Benefits Of Capital And Revenue Expenditure

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Case 9-6 a. Relative to plant assets, a cost incurred or an expenditure made, that is assumed to benefit only the current accounting period is called a revenue expenditure and is charged to expense in the period believed to benefit. A capital expenditure is similarly a cost incurred or an expenditure made but is expected to yield benefits either in all future accounting periods (acquisition of land) or in a limited number of accounting periods. Capital expenditures (if material in amount) are capitalized, that is, recorded as assets, and, if related to assets of limited life, amortized over the periods believed to benefit. The distinction between capital and revenue expenditures is of significance because it involves the timing of…show more content…
c. The factors relevant in determining the annual depreciation for a depreciable asset are the initial recorded amount (cost), estimated salvage value, estimated useful life, and depreciation method. Assets are typically recorded at their acquisition cost, which is in most cases objectively determinable. But cost assignments in other cases --"basket purchases" and the selection of an implicit interest rate in asset acquisition under deferred-payment plans--may be quite subjective involving considerable judgement. The salvage value is an estimate of an potentially realizable when the asset is retired from service. It is initially a judgment factor and is affected by the length of its useful life to the enterprise. The useful life is also a judgment factor. It involves selecting the "unit" of measure of service life and estimating the number of such units embodied in the asset. Such units may be measured in terms of time periods or in terms of activity (for example, years or machine hours). When selecting the life, one should select the lower (shorter) of the physical life or the economic life to this user. Physical life involves wear and tear and casualties; economic life involves such things as technological obsolescence and inadequacy. Selecting the depreciation method is generally a judgment decision; but, a method may be inherent in the definition adopted for the units of
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