Question

Question 3 [10 marks] You are Chief Financial Officer for Alpha Resorts. You are reviewing the following transactions: 1. Adding a new patio deck to the resort’s upscale restaurant, R180, 000 2. Painting the ocean side beach houses, R75, 000 3. Purchasing additional golf carts, R25, 000 4. Rebuilding the engine in the resort’s airport shuttle bus, R10, 000 5. Replacing the old air conditioning unit in the golf shop with a more efficient one, R20, 000 Your accountant has capitalized all of these items and intends to depreciate them over the appropriate asset’s remaining useful life as originally estimated. Indicate whether you agree or disagree with your accountant’s treatment of each item. In those cases where you disagree, state the proper treatment of that expenditure. Expenditure Agree/ Disagree Proper treatment,If Disagree 1. Adding a new patio deck to the resort’s ocean side bar, R180,000 2. Painting 10 ocean front beach houses, R75,000 3. Purchasing additional golf carts for the club house, R25,000 4. Rebuilding the engine in the resort’s airport shuttle bus, R10,000 5. Replacing the pro shop’s old air conditioning unit with a more efficient one, R20,000

Answer 1

(i) Adding a new patio deck to the resort's upscale restaurant, R180,000

It is a capital expenditure as due to this expenditure, non-current assets of the Alpha Resorts have increased and the patio deck will be used over a long period of time. Expenditure on making patio deck is a non-recurring expenditure and it is not an expense of routine nature.Hence, accountant is right when he capitalises this expenditure.

(ii) Painting ocean front beach houses,R75,000

It is a revenue expenditure as it does not lead to any increase in the value of non-current assets of Alpha Resorts. It is a recurring expense and hence it should not be capitalised. Accountant is incorrect in his approach when he capitalises this expenditure.

(iii) Purchasing additional golf carts for the club house,R25,000

It is a capital expenditure as due to this expenditure, non-current assets of the Alpha Resorts have increased and the Golf carts will be used over a long period of time. Purchasing Golf carts is a non-recurring expenditure and hence, accountant is right when he capitalises this expenditure.

(iv) Rebuilding the engine in the resort's airport shuttle bus, R20,000

It is a capital expenditure since it prolongs the useful life of the shuttle bus and makes it more productive and efficient. Expenditure on re-building of engine is a non-recurring expenditure and it is not an expense of routine nature.Hence, accountant is right when he capitalises this expenditure.

(v) Replacing the pro shop's old air conditioning unit with a more efficient one, R20,000

It is a capital expenditure as due to this expenditure, non-current assets of the Alpha Resorts have increased and the air-conditioning unit will be used over a long period of time. It is a non-recurring expense .Hence, accountant is right when he capitalises this expenditure.