Question

Distinguishing Capital Expenditures from Revenue Expenditures

Identify the following expenditures as capital expenditures or revenue expenditures:

    1.) Immediately after acquiring a new delivery truck, paid $260 to have the name of the store and other advertising material painted on the vehicle.

    2.) Painted delivery truck at a cost of $450 after two years of use.

    3.) Purchased new battery at a cost of $40 for two-year-old delivery truck.

    4.) Installed an escalator at a cost of $17,500 in a three-story building that had been used for some years without elevators or escalators.

    5.) Purchased a pencil sharpener at a cost of $15.00.

    6.) Original life of the delivery truck had been estimated at four years, and straight-line depreciation of 25 percent yearly had been recognized. After three years’ use, however, it was decided to recondition the truck thoroughly, including replacing the engine.

Answer 1

we will first understand difference between capital and revenue expenditure

	capital	revenue
	it is incurred to acquire asset or adds value to existing asset	it is incurred in normal course of business
	it increases the earning efficiency	its maintains the earning effeciency
	its non recurring cost	it is recurring cost
	it produces benefit in long term it is generally huge amount depreciated over life of asset	its benefit is consumed in short term and expensed in income statement

1) Immediately after acquiring a new delivery truck, paid $260 to have the name of the store and other advertising material painted on the vehicle.

it is long term benefit and will not recurr in near future so it is capital expenditure

2) Painted delivery truck at a cost of $450 after two years of use.

Painting after two year is revenue expenditure it will recurr again and amount is nominal.

3) Purchased new battery at a cost of $40 for two-year-old delivery truck.

batteries purchased after two year is revenue expenditure it will recurr again and amount is nominal.

4) Installed an escalator at a cost of $17,500 in a three-story building that had been used for some years without elevators or escalators.

escalator is an asset to be capitalized in balance sheet the cost is non recurring and will give benefit for long term.

it is capital expenditure

5) Purchased a pencil sharpener at a cost of $15.00.

it is small recurring cost so it will expensed as Revenue expenditure

6) Original life of the delivery truck had been estimated at four years, and straight-line depreciation of 25 percent yearly had been recognized. After three years’ use, however, it was decided to recondition the truck thoroughly, including replacing the engine.

it is a capital expenditure increase the value of asset which will benefit over long period of time.