Capital versus Revenue Expenditures

On January 1, 2015, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2017:

• 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, 2017. 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 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.

Identify and analyze the total effect of the capitalized costs on January 1, 2017 related to the building.

Activity	Investing
Accounts	Building Increase, Cash Decrease
Statement(s)	Balance Sheet

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Building

Cash

Feedback

Partially correct

Identify and analyze the total effect of the capitalized costs on January 1, 2017 related to the delivery truck.

Activity	Investing
Accounts	Delivery Truck Increase, Cash Decrease
Statement(s)	Balance Sheet

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Feedback

Incorrect

2. Determine the amount of depreciation for the year 2017. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets. Round your intermediate calculations and answers to the nearest whole dollar.

Asset	2017 Depreciation
Building	$
Truck	$

Feedback

Calculate depreciation for the appropriate assets. Set up T account for accumulated depreciation. Determine book value at end of 2017. Record depreciation by increasing the expense account.

Activity	Operating
Accounts	Depreciation Expense Increase, Accumulated Depreciation - Building Decrease, Accumulated Depreciation - Delivery Truck Increase
Statement(s)	Balance Sheet and Income Statement

Feedback

Calculate depreciation the appropriate assets. Set up T account for accumulated depreciation. Determine book value at end of 2017. Record depreciation by increasing the expense account.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

Balance Sheet

Income Statement

Stockholders'

Net

Assets

=

Liabilities

+

Equity

Revenues

Expenses

=

Income

Feedback

Incorrect

3. Prepare a partial Balance Sheet to show how would the assets appear December 31, 2017.

Jose Company
Balance Sheet (Partial)
December 31, 2017
Building	$
Accumulated depreciation		$
Delivery truck	$
Accumulated depreciation
Total property, plant, and equipment		$