Capital versus Revenue Expenditure Waleed Company, a privately owned business, supplies water to several communities. Waleed has just performed an extensive overhaul on one of its water pumps. The overhaul is estimated to extend the life of the pump by 10 years. The residual value of the pump is unchanged. You have been asked to determine which of the following costs should be capitalized as a part of this overhaul. Those costs not capitalized should be expensed. Required: CONCEPTUAL CONNECTION: Classify each cost as part of the overhaul or as an expense 1.New pump motor 2. Repacking of bearings (performed monthly) 3. New impeller (rotating component of a pump)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
28.
Capital versus Revenue Expenditure
Waleed Company, a privately owned business, supplies water to several communities. Waleed has just performed an extensive overhaul on one of its water pumps. The overhaul is estimated to extend the life of the pump by 10 years. The residual value of the pump is unchanged. You have been asked to determine which of the following costs should be capitalized as a part of this overhaul. Those costs not capitalized should be expensed.
Required:
CONCEPTUAL CONNECTION: Classify each cost as part of the overhaul or as an expense
1.New pump motor
2. Repacking of bearings (performed monthly)
3. New impeller (rotating component of a pump)
4. Painting of pump housing (performed annually)
5.Replacement of pump foundation
6.New wiring (needed every five years)
7. Installation labour, motor
8. Installation labour, impeller
9. Installation labour, wiring
10. Paint labour (performed annually)
11. Placement of fence around pump*
(*A legal requirement that will add to maintenance costs over the remaining life of the pump.)
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
