Question

Determine the proper treatment of each of the following expenditures: a. Zoe purchases land costing $8,000. During the current year, she pays $2,000 to have utilities and sewer lines installed on the property. Zoe also pays $600 in interest on the loan used to obtain the land and $300 in property taxes on the land. The cost of the land: capitalized The cost of the utilities and sewer lines: capitalized The interest on the loan (assume used in business): expensed ✓ The property taxes: expensed ✓ Feedback Check My Work To be depreciable or amortizable, the asset must have a determinable life or period of usefulness to which the cost can be attributed b. On August 2, Carruth Corporation pays $11,000 for a 2-year fire insurance policy on its manufacturing facility. Round your answer to nearest dollar. The fire insurance policy is a capital expenditure . Carruth can deduct $2,292 in the current year. Feedback Check My Work Correct c. The Freeborn Partnership purchases a rental property costing $125,000. Before it rents out the building, Freeborn repaints it at a cost of $2,000 and spends $1,200 on minor repairs. After the property is rented, a pipe bursts, requiring $2,000 in repairs. Freeborn must capitalize the $125,000 purchase price of the property. The $2,000 painting should be capitalized The $1,200 repair cost should be capitalized . The $2,000 pipe burst repair cost should be expensed

Please help me understand the difference between capitalize and expensed expenditures.

For (b), please explain how to get $2292 as an answer. Thank you.

Answer 1

A) The expenses should be capitalized when it's enhance earning capacity of an assets and increase its value on the other hand expensed expenditure just use to maintain the assets as usual condition.

The capitalized expenses occurred while purchasing of an assets or once in many years which derive future benifit for many years.On the other hand expensed expenditure is every year like repairs expenses or interest on borrowed money to purchase assets.

Like problem c where After purchase renovations is done for building before rented so it's should be capitalised in initial stage and repairs after renting property is a normal expense should be recognised as revenue expense.

B)In the problem no 2 carruth corporation paid 11,000 for 2 years on 2nd august for insurance.

So we can say it will used for 5 months in this year (August to december)

So calculations would be = 11,000×5months/24 months

= $2292