Exercise 7-17A - Distinguish capital expenditures from expenses (Learning Object

Question

Exercise 7-17A - Distinguish capital expenditures from expenses

(Learning Objective 2: Distinguish capital expenditures from expenses) Assume Plastic Products, Inc., purchased conveyor-belt machinery. Classify each of the following expenditures as a capital expenditure or an immediate expense related to machinery:

a.Sales tax paid on the purchase price

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

c.Purchase price

d.Installation

e.Training of personnel for initial operation of the machinery

f.Special reinforcement to the machinery platform

g.Income tax paid on income earned from the sale of products manufactured by the machinery

h.Major overhaul to extend the machinery’s useful life by five years

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

j.Lubrication of the machinery before it is placed in service

k.Periodic lubrication after the machinery is placed in service

Explanation / Answer

a.Sales tax paid on the purchase price - capital expense

b.Transportation and insurance while machinery is in transit from seller to buyer - capital expense

c.Purchase price - capital expense

d.Installation- capital expense

e.Training of personnel for initial operation of the machinery - capital expense

f.Special reinforcement to the machinery platform-capital expense

g.Income tax paid on income earned from the sale of products manufactured by the machinery-revenue expense

h.Major overhaul to extend the machinery’s useful life by five years- capital expense

i.Ordinary repairs to keep the machinery in good working order- revenue expense

j.Lubrication of the machinery before it is placed in service- capital expense

k.Periodic lubrication after the machinery is placed in service- Revenue expense

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