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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Capital and revenue expenditures

US Freight Lines Co. incurred the following costs related to trucks and vans used in operating its delivery service:

  1. 1. Installed GPS systems on the trucks.
  2. 2. Replaced the transmission fluid on a truck that had been in service for the past four years.
  3. 3. Overhauled the engine on one of the trucks purchased three years ago.
  4. 4. Performed annual service of installing new spark plugs, changing the oil, and greasing the joints of all trucks and vans.
  5. 5. Rebuilt the engine on one of the vans that had been driven 80,000 miles.
  6. 6. Repaired a flat tire on one of the vans.
  7. 7. Installed a hydraulic lift to a truck.
  8. 8. Tinted the back and side windows of the vans and installed a security system to discourage theft of contents.
  9. 9. Replaced a truck’s suspension system with a new suspension system, allowing for heavier loads.
  10. 10. Installed an optional third-row seat on one of the vans.

Classify each of the costs as a capital expenditure or a revenue expenditure.

To determine

Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. It provides benefits in the future period.

Revenue expenditure: It refers to the amount spent on normal maintenance and repairs of fixed assets to generate revenue in the current period. It provides benefits only in the current period.

To classify: each of the given costs as a capital expenditure or a revenue expenditure.

Explanation

Classifyeach of the given costs as a capital expenditure or a revenue expenditure.

1.

An installed GPS system on the trucks is a capital expenditure as it would improve the operational efficiency of the truck.

2.

Replaced the transmission fluid on a truck that had been in service for the past four years is a revenue expenditure. It is an ordinary maintenance expenditure and would provide benefits only in the current period.

3.

Overhauled the engine on one of the trucks purchased three years ago is a capital expenditure as it would improve the operational efficiency of the truck.

4.

Performed annual service of installing new spark plugs, changing the oil, and greasing the joints of all the trucks and vans is a revenue expenditure. It is an ordinary repairs and maintenance expenditure and would provide benefits only in the current period.

5.

Rebuilt the engine on one of the vans that had been driven 80,000 miles is a capital expenditure as it would extend the useful life of the van...

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