Question

5. Immediately after a used truck is acquired, a new motor is installed and the tires are replaced at a total cost of $5,750. Is this a capital expenditure or a revenue expenditure

Answer 1

Answer:

CAPITAL EXPENDITURE

Explanation:

In accounting, an expense carried out is considered to be capital expenditure when the asset is an investment with a life of more than one year or a newly purchased capital asset or an expense which improves the useful life of an existing capital asset.

Capital Expenditure is the money an organization or firm uses to purchase, maintain, upgrade or improve its fixed assets such as vehicles, production equipment, buildings or land.

Capital expenditures on fixed assets may include everything ranging from repairing a roof to building, to purchasing a new vehicle or upgrading a newly purchased used vehicle.

Therefore, the total costs of $5,750 used in the installation of a new motor and replacement of the tires are the CAPITAL EXPENDITURE.

Other examples of CAPITAL EXPENDITURE are costs of:

- Buildings (with costs to extend useful life)

- Land (with the cost of upgrading land e.g irrigation system setup, land clearing, etc)

- Machinery (with costs of transporting equipment to factory)

etc.

Answer 2

Answer: Capital Expenditure

Explanation:

Capital Expenditure occurs if the expense made was to enhance the capability of an asset to perform the role for which it was acquired over an extended period of time.

The new motor and tires will go a long way in making sure that the Truck benefits the company over a long period of time and so should be considered CAPITAL EXPENDITURE.

Do comment if you need any further clarification.