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9 December, 12:41

Capitalizing versus expensing For each of the following expenditures, indicate the type of account (asset or expense) in which the expenditure should be recorded. Explain your answers. a. $30,000 annual cost of routine repair and maintenance expenditures for a fleet of delivery vehicles. b. $12,000,000 cost to develop a coal mine, from which an estimated 1 million tons of coal can be extracted. c. $248,000 cost to replace the roof on a building. d. $140,000 cost of a radio and television advertising campaign to introduce a new product line. e. $8,000 cost of grading and leveling land so that a building can be constructed.

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  1. 9 December, 12:58
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    a) an expense b) a capitalized cost c) a capitalized cost d) an expense e) a capitalized cost.

    Explanation:

    The question is to determine how the following transactions should be recorded based on capitalizing or expensing

    a) $30,000 annual cost of repair and maintenance expenditures represents an expense, this is because it is not a cost associated to the usefulness or the estimated life use of the delivery vehicles, as such these cost cannot be capitalized

    b) The $12,000,000 to develop a coal mine represents the initial cost of acquiring the asset (the coal mine). Usually, the cost of an asset is usually the cost of acquisition plus the set-up cost. From this coal mine revenue will be generated, hence this is a capitalized cost.

    c) $248,000 roof replacement cost, this is capitalized and recorded as an asset cost because it will extend the useful life of the building which is an asset.

    d) $140,000 cost of advertising campaign for a new product line should be recorded as an expense this is because it is part of advertising cost which is usually treated as expenses in the statement of income

    e) $8,000 cost of grading and leveling land to construct a building will be treated as a capitalized cost because is part of the costs of getting the land (an asset) ready for its future use of erecting a building
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