Capital versus Revenue Expenditures

On January 1, 2014, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2016:

• The building was painted at a cost of $5,000.
• To prevent leaking, new windows were installed in the building at a cost of $10,000.
• To improve production, a new conveyor system was installed at a cost of $40,000.
• The delivery truck was repainted with a new company logo at a cost of $1,000.
• To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.
• The truck's engine was overhauled at a cost of $4,000.

Required:

1.Determine which of those costs should be capitalized. Assume that all costs were incurred on January 1, 2016. Select "Yes" if the cost should be capitalized; otherwise select "No".

The building was painted at a cost of $5,000.No

To prevent leaking, new windows were installed in the building at a cost of $10,000.No

To improve production, a new conveyor system was installed in the building at a cost of $40,000.Yes

The delivery truck was repainted with a new company logo at a cost of $1,000.No

To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.Yes

The truck's engine was overhauled at a cost of $4,000.No

Feedback

Capital expenditures are costs that improve an asset and are added to the asset account. Debit the asset account and credit Cash for amount paid. Revenue expenditures are costs that keep an asset in its normal operating condition and are treated as an expense.

Prepare the journal entry to capitalize the conveyor system. How does this entry affect the accounting equation?

Indicate the effect on financial statement items by selecting "-" for decrease (or negative effect), "+" for increase (or positive effect) and "NE" for No Entry (or no effect) on the financial statement.

JournalBalance SheetIncome Statement