On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for

Exercise 8-11 Capital versus Revenue Expenditures

E8-11 Jose Company

E8-11 On January 1, 2012, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2014:

·         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. Also, identify and analyze the effect of the capitalized costs. Assume that all costs were incurred on January 1, 2014.

2. Determine the amount of depreciation for the year 2014. 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.

3. How would the assets appear on the balance sheet of December 31, 2014?  

Hint: Read carefully the way a cost is determined to be either an asset or an expense. Also be sure to notice the dates since that could impact your answers.

TUTORIAL PREVIEW

EXERCISE 8-11 CAPITAL VERSUS REVENUE EXPENDITURES

1.   The following entries should be made to capitalize costs:

      Jan. 1         Building                                                                                   40,000

                              Cash                                                                                                           40,000

                        To record cost of new conveyor system.

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