Chapter 8: Additional Expenditures (Sections 1, 2, 3)

Distinguishing Between Revenue and Capital Expenditures 1. Revenue Expenditures: o Definition: Costs that do not significantly increase the asset’s life or capabilities and are expensed in the current period. o Examples: Ordinary repairs and maintenance, like cleaning, oil changes, or minor part replacements. o Accounting Treatment: These costs are recorded as expenses on the income statement, reducing current-period income. 2. Capital Expenditures: o Definition: Costs that provide benefits over multiple periods, extending an asset’s useful life or improving its productivity. o Examples: Major improvements, betterments (like upgrading a machine to improve efficiency), and extraordinary repairs. o Accounting Treatment: These costs are added to the asset’s book value on the balance sheet and depreciated over the asset’s remaining useful life. Types of Expenditures and Accounting Examples 1. Ordinary Repairs (Revenue Expenditures): o Purpose: Keep assets in working condition without extending useful life. o Example Entry: If a company incurs $9,500 in repair costs for a machine, it records: bash Debit: Repair Expense $9,500 Credit: Cash $9,500 2. Betterments (Capital Expenditures): o Purpose: Improve an asset’s efficiency or productivity. o Example: A company adds an automatic control system to a machine at $1,800, increasing the Machinery account and revising future depreciation. bash Debit: Machinery $1,800 Credit: Cash $1,800 o New Book Value Calculation: Original cost minus accumulated depreciation plus betterment cost. 3. Extraordinary Repairs (Capital Expenditures): o Purpose: Extend the asset’s useful life beyond the original estimate. o Example: If $500 is paid for repairs expected to extend an asset’s life by a year, this is a capital expenditure, and depreciation calculations are revised to account for the increased life. Disposal of Plant Assets When an asset is disposed of through discarding or selling, the following accounting steps apply: 1. Discarding Fully Depreciated Assets: o If an asset with a $9,000 original cost and $9,000 accumulated depreciation is discarded, it’s considered fully depreciated with zero book value. bash Debit: Accumulated Depreciation $9,000 Credit: Machinery $9,000 2. Discarding Partially Depreciated Assets: o Example: An asset with a $1,500 book value ($8,000 cost - $6,500 accumulated depreciation) is discarded, resulting in a loss of $1,500 since no proceeds are received. vbnet Debit: Accumulated Depreciation $6,500 Debit: Loss on Disposal $1,500 Credit: Equipment $8,000 3. Selling Plant Assets: o Steps involve calculating gain or loss based on the sale price compared to the asset’s book value:  Sale at Book Value: No gain or loss.  Sale Above Book Value: Record a gain.  Sale Below Book Value: Record a loss. Example Calculations for Disposal For equipment with a $500 cost and $400 accumulated depreciation (book value $100): 1. Disposed with No Return: vbnet Debit: Accumulated Depreciation $400 Debit: Loss on Disposal $100 Credit: Equipment $500 2. Sold for Cash: o At $80: vbnet Debit: Cash $80 Debit: Accumulated Depreciation $400 Debit: Loss on Sale $20 Credit: Equipment $500 o At $100 (No Gain or Loss): bash Debit: Cash $100 Debit: Accumulated Depreciation $400 Credit: Equipment $500 o At $110 (Gain of $10): vbnet Debit: Cash $110 Debit: Accumulated Depreciation $400 Credit: Equipment $500 Credit: Gain on Sale $10