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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

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

The following expenditures were incurred during the year:

a. Paid $4,000 for an overhaul of an automobile engine.

b. Paid $20,000 to add capacity to a cellular phone company’s wireless network.

c. Paid $200 for routine maintenance of a manufacturing machine.

d. Paid $10,000 to remodel an office building.

e. Paid $300 for ordinary repairs

Required:

1. Classify the expenditures as either capital or revenue expenditures.

2. CONCEPTUAL CONNECTION If management improperly classified these expenditures, what would be the impact on the financial statements?

To determine

Concept introduction:

Capital Expenditures:

Capital expenditures are those which provide future economic benefits by improving the life, quality, efficiency of an asset. Some of the examples of capital expenditures are major improvements to the existing asset, remodelling and additions to the existing facility.

Revenue Expenditures:

Revenue expenditures occur frequently and they do not increase the future economic benefits from the asset and in fact they are expensed in the same accounting period in which the expenses are incurred. Some of the examples of revenue expenditures are maintenance and repair costs and costs involved in replacing minor items.

Requirement 1:

Classify the expenditures as a capital or revenue expenditure.

Explanation
  1. Overhaul of automobile engine is a revenue expenditure since it is a maintenance and repair cost.
  2. Addition of capacity to wireless network is a capital expenditure since it helps in improving the efficiency and life of the existing asset...
To determine

Concept introduction:

Capital Expenditures:

Capital expenditures are those which provide future economic benefits by improving the life, quality, efficiency of an asset. Some of the examples of capital expenditures are major improvements to the existing asset, remodelling and additions to the existing facility.

Revenue Expenditures:

Revenue expenditures occur frequently and they do not increase the future economic benefits from the asset and in fact they are expensed in the same accounting period in which the expenses are incurred. Some of the examples of revenue expenditures are maintenance and repair costs and costs involved in replacing minor items.

Requirement 2:

To explain:

Analyse the impact on financial statements if management wrongly classified these expenditures.

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