Question

Paid $52,000 cash to replace a compressor on a refrigeration system that extends its useful life by four years. Paid $260 cash per truck for the cost of their annual tune-ups. Paid $208 for the monthly cost of replacement filters on an air-conditioning system. Completed an addition to an office building for $292,500 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

Answer:

1. Paid $52,000 cash to replace a compressor on a refrigeration system that extends its useful life by four years - Capital expenditure.

Paid $260 cash per truck for the cost of their annual tune-ups - This is a maintenance cost, a revenue expenditure.

Paid $208 for the monthly cost of replacement filters on an air-conditioning system - This is a maintenance cost, a revenue expenditure.

Completed an addition to an office building for $292,500 cash - Capital expenditure.

2. Debit Fixed asset (equipment) $52,000

   Credit Cash           $52,000

Being entries to capitalize the cost of compressor replaced

   Debit Fixed asset (Building) $292,500

   Credit Cash           $292,500

Being entries to record the cost of addition to an office building

Explanation:

Revenue expenditure are cost or expenses incurred on items that would not last beyond a year. They are current in nature. Capital expenditure are cost incurred on items that will last beyond a year.

In other words, cash inflows from an items of capital expenditure are expected to flow to the entity for more than a year.