Given the following list of outlays, indicate whether each is normally considere

Question

Given the following list of outlays, indicate whether each is normally considered a capital expenditure or an operating expenditure. Explain your answers.******** a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems. b. An outlay of $20,000 to purchase patent rights from an inventor. c. An outlay of $80,000 for a major research and development program. d. An $80,000 investment in a portfolio of marketable securities. e. A $300 outlay for an office machine. f. An outlay of $2,000 for a new machine tool. g. An outlay of $240,000 for a new building. h. An outlay of $1,000 for a marketing research report.

Explanation / Answer

Thumb rule: The Asset which is in Balance sheet is a Capital Exp & others are Op exp. a. An initial lease payment of $5,000 for electronic point-of-sale cash register systems. Operating expenditure. This is like regular rental payments. No Asset is created. Hence it is an Op Exp. b. An outlay of $20,000 to purchase patent rights from an inventor. Capital Exp : An Asset is acuired & it will written off over its life. Patent life is usually 20 yrs c. An outlay of $80,000 for a major research and development program. Op Exp. No Asset is created. This exp will be passed through P&L acct d. An $80,000 investment in a portfolio of marketable securities. Cap Exp : Investment in security a/c is an Asset acct & will be in Balance sheet e. A $300 outlay for an office machine. Cap Exp : Office machine is an Asset. f. An outlay of $2,000 for a new machine tool. Op Exp : machine tool is a expensed item g. An outlay of $240,000 for a new building. Cap Exp: A New Assetis created in Balance sheet h. An outlay of $1,000 for a marketing research report. Op Exp: This exp is passed hrough P&L

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