Question 1 Classify each of the following costs as to whether they should be cap

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Question 1 Classify each of the following costs as to whether they should be capitalized, deferred or expensed? $40,000 2. New winter tires for all company vehicles to give them better traction Purchase price of a new transmission for an older vehicle after the original one stopped 3. 4. Annual repairs and maintenance on the entire fleet of vehicles 5. Cost of registration of the new vehicle for 2 years 6. Cost of annual insurance for the entire fleet of vehicles 7. Cost of painting the company's logo on the new vehicle $5,000 $250 $36,000 $1,000 $8,500 8. Cost of gas cadsforthe entire fleet of vehicles

Explanation / Answer

Answer:

(Amount in $) Sl No Particulars Amount Answer 1 Purchase price of new vehicle 40,000 capitalized Reason : The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use. Here, it is the purchase price of the new vehicle. Hence it is a capital expenditure. 2 New winter tires for all company vehicles to give them better traction 20,000 Expensed Reason : The expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance can be capitalized. Here, New winter tires for all company vehicles are for better traction not to increase the standard of performance. It is an expenditure only. 3 Purchase price of new transmission for an older vehicle after the original one stopped working 6,000 Expensed Reason : The expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance can be capitalized. Here, Purchase price of new transmission for an older vehicle won't sute for capitalization. It is an expenditure only. 4 Annual repairs and maintenance on the entire fleet of vehicles 5,000 Expensed Reason : The expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance can be capitalized. Here, Annual repairs and maintenance on the entire fleet of vehicles is an expenditure type of activity to continue the present standard of performance. 5 Cost of registration of the new vehicle for 2 years 250 capitalized Reason : The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use. Here, Cost of registration of the new vehicle for 2 years can be considered as an expenditure that attributable to the cost of bringing the asset to its working condition. Hence it is a capital expenditure. 6 Cost of annual insurance for the entire fleet of vehicles 36,000 Deferred Reason : There are expenditures which are treated as deferred expendiure. Deferred expenditures are the cost which are already been incurred, but which has not yet been consumed. Here, Cost of annual insurance for the entire fleet of vehicles has been made during the period mostly. So a part of the expenditure form part of the current year profit and loss account and the next part forms part of next year. So it is a kind of deferred expenditure. 7 Cost of painting the company's logo on the new vehicle 1,000 capitalized Reason : The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use. Here, Cost of painting the company's logo on the new vehicle can be considered as an expenditure that attributable to the cost of bringing the asset to its working condition. Hence it is a capital expenditure. 8 Cost of gas cards for the entire fleet of vehicles 8,500 Expensed Reason : The expenditure that increases the future benefits from the existing asset beyond its previously assessed standard of performance can be capitalized. Here, Cost of gas cards for the entire fleet of vehicles is not an expenditure that increases the performance of the vehicle. It is an expenditure only.

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