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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Expenditures After Acquisition

Listed below are several transactions:

a. Paid $80 cash to replace a minor part of an air conditioning system.

b. Paid $40,000 to fix structural damage to a building.

c. Paid $8,000 for monthly salaries.

d. Paid $12,000 to replace a manual cutting machine with a computer-controlled machine.

e. Paid $1,000 related to the annual painting of a building.

Required:

Classify each transaction as either a revenue expenditure, a capital expenditure, or neither.

To determine

In addition to costs incurred when Property plant and equipment are purchased, other costs arise in organizations over the life of the asset which range from normal repairs and maintenance to extraordinary overhauls, additions and improvements. It is Company’s decision either to capitalize or expense off these expenditures.

To classify:

the transactions as revenue or capital expenditure or neither.

Explanation

Revenue expenditure:

Expenditure which do not tend to increase the assets’ economic benefit are classified as revenue expenditures .These expenses are usually expensed off in the same year the expenditure is made. These expenditures are of such nature that benefit derived out of them relate only to the current period, occur frequently and also amount of dollars involved are relatively small.

Capital expenditure:

Expenditure that enhance the life of the asset, enhances the production capacity, boosts efficiency, or improve the quality of the product are classified as capital expenditure. These expenditures typically involve larger amounts...

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