Question

Determining Whether to Capitalize or Expense For each of the following items, indicate whether the cost should be capitalized (C) or expensed (E) immediately: a. Paid $1,200 for routine maintenance of machinery b. Paid $5,400 to rent equipment for two years c. Paid $2,000 to equip the production line with new instruments that measure quality d. Paid $20,000 to repair the roof on the building e. Paid $1,600 to refurbish a machine, thereby extending its useful life f. Purchased a patent for $5,000

Answer 1

Answer:

To Capitalize or Expense

a. Expense

b. Expense $2,700 Capitalize $2,700

c. Capitalize

d. Expense

e. Capitalize

f. Capitalize

Explanation:

1) Data and Analysis:

a. Maintenance Expense $1,200 Cash $1,200

b. Rent Expense $2,700 Prepaid Rent $2,700 Cash $5,400

c. Equipment $2,000 Cash $2,000

d. Building Repair Expense $20,000 Cash $20,000

e. Equipment Extension $1,600 Cash $1,600

f. Patent $5,000 Cash $5,000

2) All costs incurred for a period are expensed in the period in which the resources are consumed.  If the resources will not be consumed in a period, the costs are capitalized.  Such costs are then expensed periodically through depreciation (for tangible assets), amortization (for intangible assets), or depletion (for acquired natural resources).