Question

Using two peer reviewed sources

Define long-term operational assets. How are capital expenditures made to improve the quality of assets? Would the answer change if the expenditure extended the life of the asset but did not improve quality? Explain... Capital expenditures are generally associated with long-term goals. Why do you think making wise decisions on capital expenditures is good for business?

Answer 1

Long-term operational assets are assets that will be used for an extended period of time, two or more accounting periods. They are typically equipment, land, & buildings. Long term assets may be tangible or intangible. Tangible assets have a physical presence; they can be seen and touched; includes equipment, machinery, natural resources, and land. Classified as property, plant, equipment; natural resource; land. Intangible assets Have no physical form; cannot be seen or touched. They are more likely to be physical documents, rights or privileges.

When a capital expenditure improves the quality of an asset, this improvement is then accounted for as if it were a new purchased asset; the account for equipment is then debited. The improvement is depreciated over the remaining life of the original asset since the life of the asset is not extended. Only the quality of the asset is improved. When an expenditure extends the life of the asset, this expenditure in effect reduces some of the depreciation already taken on the asset. This is accomplished by reducing the accumulated depreciation account (a debit to accumulated depreciation). Depreciation is recalculated by spreading the remaining book value, reduced by salvage value, over the remaining estimated life of the asset.

Business need to make good decisions on capital expenditures to help the business grow and operate. Creating a budget for “capital expenditures is critical future planning”. The market is always pushing people to plan for the future. It is almost second nature that we gravitate towards our future on earth. The process of setting goals must be infused with humility. Capital budgeting decisions also give an indication regarding what direction the company plans to move in the years ahead. Capital expenditure budgets are commonly constructed to cover periods of five to 10 years and can serve as major indicators regarding a company's "five-year plan" or long-term goals.