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Chapter 9: 19E (page 488)

: Distinguishing capital expenditures from revenue expenditures consider the following expenditures:

a. Purchase price.

b. Ordinary recurring repairs to keep the machinery in good working order.

c. Lubrication before machinery is placed in service.

d. Periodic lubrication after machinery is placed in service.

e. Major overhaul to extend useful life by three years.

f. Sales tax paid on the purchase price.

g. Transportation and insurance while machinery is in transit from seller to buyer.

h. Installation.

i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure

Short Answer

Expert verified

A company can incur Capital Expenditure for long-term purposes and benefits.

Revenue Expenditure is the expenditure related to the day-to-day activities of business operations.

Step by step solution

01

Meaning of Capital Expenditure and Revenue Expenditure

Capital Expenditure: All the funds utilized by the company for the acquisition and maintenance of the fixed assets are known as capital expenditure.

Revenue Expenditure: The expenses incurred to generate revenue or for managing the operating activities of the company are known as revenue expenditures.

02

Difference between Capital Expenditure and Revenue Expenditure 

Particular

Revenue/Capital expenditure

a. Purchase price

Capital expenditure

b. Ordinary recurring repairs to keep the machinery in good working order.

Revenue expenditure

c. Lubrication before machinery is placed in service

Capital expenditure

d. Periodic lubrication after machinery is placed in service

Revenue expenditure

e. Major overhaul to extend useful life by three years

Capital expenditure

f. Sales tax paid on the purchase price

Capital expenditure

g. Transportation and insurance while machinery is in transit from seller to buyer

Capital expenditure

h. Installation

Capital expenditure

i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure

Capital expenditure

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Most popular questions from this chapter

Question: P9-36B Determining asset cost and recording partial-year depreciation

Safe Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a

Purchase price of three acres of land

$86,000

b

Delinquent real estate taxes on the land to be paid by safe parking

6,300

c

Additional dirt and earth removing

8,400

d

Title insurance and the land acquisition

3,400

e

Fence around the boundary of the property

9,600

f

Building permit for building

900

g

Architect’s fee for design of building

20,100

h

Signs near the front of property

9,000

i

Material used to construct the building

217,000

J

Labor to construct the building

172,000

k

Interest cost on construction loan for the building

9,500

l

Parking lots on the property

29,400

m

Lights for parking lots

11,600

n

Salary of construction supervisor(80% to building; 20% to parking lot and concrete walks)

80,000

o

Furniture

11,700

p

Transportation of furniture from seller to the building

1,900

q

Additional fencing

6,900

Safe Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value.

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on September 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar.

What is goodwill? Is goodwill amortized? What happens if the value of goodwill has decreased at the end of the year?

Accounting for depletion of natural resources Ajax Petroleum holds huge reserves of oil assets. Assume that at the end of 2018, Ajax Petroleum’s cost of oil reserves totaled $27,000,000, representing 3,000,000 barrels of oil.

Requirements

  1. Which method does Ajax Petroleum use to compute depletion?
  2. Suppose Ajax Petroleum removed and sold 500,000 barrels of oil during 2019. Journalize depletion expense for 2019.

Budget Banners pays \(200,000 cash for a group purchase of land, building, and equipment. At the time of acquisition, the land has a market value of \)22,000, the building \(187,000, and the equipment \)11,000. Journalize the lump-sum purchase.

Discarding of a fully depreciated asset On June 15, 2017, Family Furniture discarded equipment that cost \(27,000, a residual value of \)0, and was fully depreciated. Journalize the disposal of the equipment.
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