CAPITAL VERSUS REVENUE EXPENDITURE Warrick Water Company, a privately owned business, supplies water to several communities.

Warrick has just performed an extensive overhaul on one of its water pumps. The overhaul is expected to extend the life of the pump by 10 years. The residual value of the pump is unchanged. You have been asked to determine which of the following costs should be capitalized as a part of this overhaul. Those costs not capitalized should be expensed.

Element of Cost Classification and Explanation New pump motor Repacking of bearings (performed monthly)

New impeller Painting of pump housing (performed annually)

Replacement of pump foundation New wiring (needed every five years)

Installation labor, motor Installation labor, impeller Installation labor, wiring Paint labor Placement of fence around pump*

* A requirement of the Occupational Safety and Health Administration that will add to maintenance costs over the remaining life of the pump.

Required:

Classify each cost as part of the overhaul or as an expense. Be sure to explain your reasoning for each classification.

Exercise