Question

UPS is working with the New York State Energy Research and Development Authority to develop new technology that will allow UPS to convert its diesel-fuelled delivery trucks to electric-fuelled. UPS hopes to have a working model of the converted delivery truck ready sometime in 2020. The plan is to convert 1,500 of the company’s delivery vehicles in New York City, representing 66% of its fleet there, by the year 2022. UPS wants to convert its fleet to be all-electric because electric-fuelled trucks eliminate harmful emissions, noise, and dependence on fossil fuels. UPS drivers will use the electric trucks during the day and recharge them overnight.

Questions

1. What is the difference between capitalizing an expenditure versus expensing that expenditure?
2. What information would you need to be able to determine if UPS should capitalize or expense the cost of converting the trucks to be all-electric?
3. Do you think UPS will capitalize or expense the cost of converting to electric vehicles?

Answer 1

Part 1

Capitalizing an expenditure means an expenditure is added to the cost of an asset and reported in the balance sheet as an asset. Its annual depreciation is reported on the income statement to determine the value of net profit. On the other hand expensing an expenditure states the revenue nature of expenditure and thus the reporting of expenditure on the income statement. It is deducted from the revenues to calculate the value of net profit.

Part 2

The time period required to realize benefits from the cost of converting the trucks to be all-electric would be needed to be able to determine if UPS should capitalize or expense the cost of converting the trucks to be all-electric.

Part 3

The benefits of the cost of converting the trucks to be all-electric are expected to accrue in the future coming years. There is likely to be deferred revenue and thus UPS will capitalize the cost of converting to electric vehicles.