Question

QS 8-9 Revenue and capital expenditures LO C3 a. Paid $66,000 cash to replace a motor on equipment that extends its useful life by four years. b. Paid $330 cash per truck for the cost of their annual tune-ups. c. Paid $264 for the monthly cost of replacement filters on an air-conditioning system. d. Completed an addition to a building for $371,250 cash. 1. Classify the above transactions as either a revenue expenditure or a capital expenditure. 2. Prepare the journal entries to record transactions a and d

Answer 1

Solution

1. Classification of transactions as revenue or capital expenditures:

1. Paid $66,000 cash to replace a motor on equipment that extends its useful life by four years –

Nature - Capital expenditure transaction.

Explanation: The payment of $66,000 made to replace a motor equipment extends the useful life of the equipment by four years. This indicates that the benefit of payment of $66,000 extends to four years and does not expire in the year it is expensed. Also, the expenditure for replacement of motor is a non-recurring one.

Hence, this transaction is a capital expenditure.

2. Paid $330 per truck for the cost of their annual tune-ups –

Nature – Revenue Expenditure transaction

Explanation: The payment of $330 per truck for the cost annual tune-ups is a regular nature. The tune-up activity forms part of regular maintenance and does not add any value to the truck worth. The tune-up costs recur every year and hence this transaction is of revenue nature.

3. Paid $264 for the monthly cost of replacement filters on an air-conditioning system –

The monthly payment of $264 for replacement filters ensures the smooth working of air-conditioning system. This expenditure is a recurring one and is incurred to keep the equipment in revenue generating state. Hence, the transaction is of Capital Expenditure.

4. Completed an addition to a building $371,250

This transaction is classified as Capital Expenditure transaction.

Explanation: the amount expensed is for the addition of building, which ensures revenue generation over a period of time. Since, the expenditure ensures regular income generation, the expenditure of is capital nature.

2. Journal Entries:

Transaction	General Journal	Debit	Credit\
a	Equipment	$66,000
	Cash		$66,000
	(To record payment made to replace motor on equipment
d	Building	$371,250
	Cash		$371,250
	(To record addition to building)