Question

Consider the expenditures listed below and classify each of the expenditures as a capital expenditure or a revenue expenditure related to machinery.
a.

Purchase price.

b.

Ordinary recurring repairs to keep the machinery in good working order.

c.

Lubrication before machinery is placed in service.

d.

Periodic lubrication after machinery is placed in service.

e.

Major overhaul to extend useful life by three years.

f.

Sales tax paid on the purchase price.

g.

Transportation and insurance while machinery is in transit from seller to buyer.

h.

Installation.

i.

Training of personnel for initial operation of the machinery.

Answer 1

Answer:

a.  Purchase price.  This is capital expenditure.

b.  Ordinary recurring repairs to keep the machinery in good working order.   This is revenue expenditure

c.  Lubrication before machinery is placed in service.  This is revenue expenditure.

d.  Periodic lubrication after machinery is placed in service.  This is revenue expenditure.

e.  Major overhaul to extend useful life by three years.  This is capital expenditure.

f.  Sales tax paid on the purchase price.  This is capital expenditure. However, if sales tax is refundable than this will neither be classified as capital expense nor revenue expense.

g.  Transportation and insurance while machinery is in transit from seller to buyer.  This is capital expenditure.

h.  Installation.  This is capital expenditure.

i.  Training of personnel for initial operation of the machinery. This is revenue expenditure.

Explanation:

The costs that are charge as expense in profit and loss statement in the period in which thay are incurred are known as revenue expense.

The costs that are capitalized initially and expensed out as benifits, are derived from it, are classified as capital expenditure.