Question

Belltone Company made the following expenditures related to its 10-year-old manufacturing facility: 

1. The heating system was replaced at a cost of $250,000. The cost of the old system was not known. The company accounts for improvements as reductions of accumulated depreciation. 

2. A new wing was added at a cost of $750,000. The new wing substantially increases the productive capacity of the plant. 

3. Annual building maintenance was performed at a cost of $14,000. 

4. All of the equipment on the assembly line in the plant was rearranged at a cost of $50,000. The rearrangement clearly increases the productive capacity of the plant.

 

Required: 

Prepare journal entries to record each of the above expenditures.

 

 

Answer 1

Capital expenditure:

Capital expenditure is the amount incurred to acquire or maintain a long-term asset. Capital expenditure incurred will increase the life of the asset. This expenditure will increase the asset balance which will be reflected in the balance sheet.

 

Revenue expenditure:

Revenue expenditure is the amount incurred for the maintenance of a long-term asset in the current period. It implies amount incurred will not increase the life of the long-term asset. This expenditure will increase the expenses which will be reflected in the income statement.

 

Journal entries:

Prepare the journal entries to record the expenditures incurred as shown below:

 

1.

General Journal
Date	Account Titles and Explanation	Ref.	Debit	Credit
	Accumulated depreciation-Heating system		$250,000
	Cash			$250,000
	(To record the cost incurred for replacement of heating system)

 

Explanation:

Replacement of heating system is an extraordinary repair; it is recorded by debiting the contra-asset account termed as accumulated depreciation-heating system. Accumulated depreciation-heating system is debited because replacement cost will increase the life of the truck.

 

Cash is paid for the replacement; it implies the cash balance is decreased. Decrease in cash balance is recorded by crediting the cash account. Thus, Accumulated depreciation-heating system account is debited and the cash account is credited.

 

2.

General Journal
Date	Account Titles and Explanation	Ref.	Debit	Credit
	Accumulated depreciation-Heating system		$750,000
	Cash			$750,000
	(To record the cost incurred for addition of new wing to the plant)

 

Explanation:

Addition of new wing to the plant is termed as asset improvement expenditure. It is recorded by debiting the plant account (respective asset account). Plant asset account is debited because it improves the performance of the plant.

 

Cash is paid for the addition; it implies the cash balance is decreased. Decrease in cash balance is recorded by crediting the cash account. Thus, the plant account is debited and the cash account is credited.

 

3.

General Journal
Date	Account Titles and Explanation	Ref.	Debit	Credit
	Accumulated depreciation-Heating system		$14,000
	Cash			$14,000
	(To record the cost incurred for the annual building maintenance)

 

Explanation:

Annual building maintenance cost will be termed as ordinary maintenance and repairs. It is recorded by debiting the repairs and maintenance expense account. Repairs and maintenance expense account is debited because it is an ordinary maintenance in the current year.

 

Cash is paid for the maintenance; it implies the cash balance is decreased. Decrease in cash balance is recorded by crediting the cash account. Thus, Repairs and maintenance expense account is debited and the cash account is credited.

 

4.

General Journal
Date	Account Titles and Explanation	Ref.	Debit	Credit
	Accumulated depreciation-Heating system		$50,000
	Cash			$50,000
	(To record the cost incurred for rearrangement of assembly line in the plant)

 

Explanation:

Rearrangement of assembly line in the plant is termed as asset improvement expenditure. It is recorded by debiting the plant account (respective asset account). Plant asset account is debited because it improves the performance of the plant.

 

Cash is paid for the addition; it implies the cash balance is decreased. Decrease in cash balance is recorded by crediting the cash account. Thus, the plant account is debited and the cash account is credited.

Capital expenditure:

Capital expenditure is the amount incurred to acquire or maintain a long-term asset. Capital expenditure incurred will increase the life of the asset. This expenditure will increase the asset balance which will be reflected in the balance sheet.