n2 AramarkMy Profile AMyStaffmark ABp Fox owns and operates Piatinum Transport C
ID: 2565662 • Letter: N
Question
n2 AramarkMy Profile AMyStaffmark ABp Fox owns and operates Piatinum Transport Co. During the past year, Jackle incurred the following costs related to an 18-wheel truck: Classify each of the costs as a capital expenditure or a revenue expenditure 1. Changed engine oil 2. Installed a television in the sleeping compartment of the truck. top of the cab to increase fuel mileage. 4. Modifed the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to th 5. Replaced a headlight that had burned out. 6. Replaced a shock absorber that had worn out.Explanation / Answer
Platinum Transport Company
Determination of nature of expenditure – revenue or capital for each of the costs:
Explanation: Revenue expenditure is an expenditure the benefit of which is received during the same accounting period and the cost which is expensed in the same accounting period. Benefit of engine oil change is only for the accounting period in which the cost is incurred as well as the cost is expensed in the same accounting period.
Any expenditure the benefit of which is available for multiple accounting periods and the cost expensed over the current and future accounting periods throughout the asset’s useful life is capital expenditure. The benefit of Television is available across multiple periods and the cost is expensed in current and future periods of useful life.
The benefit of this cost (fuel efficiency) would be available throughout the deflector’s useful life and hence it’s a capital expenditure.
The expenditure on a special order kit would provide benefit over its useful life in terms of improved engine performance. Since the benefit is spread beyond the current accounting period and the cost is incurred to improve the utility of turbo charger, the cost is a capital expenditure.
The cost incurred to replace worn out components are expenses to maintain the normal operations of the asset and not to enhance the asset’s earning capacity. Hence, replacement of headlight is a revenue expenditure.
The cost is incurred to keep the vehicle in its normal working condition and does not add to its overall earning capacity, also the cost is of recurring nature and expensed in the current accounting period. Hence, replacement of worn out components is revenue expenditure.
The cost of replacement is for ensuring the regular operation of the asset and the cost is expensed in the current accounting period. Hence, the replacement cost is revenue expenditure.
The cost of replacing the hydraulic brake system is non-recurring, and the benefit is improved truck performance. Hence, the cost is capital expenditure.
The cost incurred on new communication module would improve the performance of asset and the benefit is spread beyond the current accounting period. Hence, this is capital expenditure.
The cost of replacement of radar detector with latest model featuring locking device would enhance the asset’s performance and the benefit is spread beyond the current accounting period. Also, this cost is of non-recurring nature. Hence, the cost to replace radar detector with a advanced model is capital expenditure.
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