Question

CAPITALIZING VS. EXPENSING

UPS is working with the New York State Energy Research and Development Authority to develop new technology that will allow UPS to convert its diesel-fueled delivery trucks to electric-fueled. UPS hopes to have a working model of the converted delivery truck ready sometime in 2018. The plan is to convert 1,500 of the company’s delivery vehicles in New York City, representing 66% of its fleet there, by the year 2022.

UPS wants to convert its fleet to be all-electric because electric-fueled trucks eliminate harmful emissions, noise, and dependence on fossil fuels. UPS drivers will use the electric trucks during the day and recharge them overnight.

Questions

What is the difference between capitalizing an expenditure versus expensing that expenditure?

What information would you need to be able to determine if UPS should capitalize or expense the cost of converting the trucks to be all-electric?

Do you think UPS will capitalize or expense the cost of converting to electric vehicles?

Answer 1

Capitalizing an expenditure means that it will be shown as asset in the Balance sheet and annual amortization of such expenses shall be provided in the income statement to determine the amount of profit. Expending an expenditure on the other hand means directly debiting the expenditure against the revenue to determine the amount of profit. Capitalization of expenditure is made when an organization expects to benefit from such expenditure for more than one financial year. Expending an expenditure on the other hand means that the benefit from such expenditure will only accrue and extend to the particular financial year in which the expenditure has been recognized in the books of accounts.

The expected benefit from UPS shall be assessed and whether the use of UPS would financially benefit the organization for more than one year shall be assessed from information available to determine whether the expenditure should be capitalized or the expenditure should be debited in the profit and loss account.

In this case the cost of converting the trucks to be all electric should be capitalized as the benefit is expected to accrue in the future periods for more than one years including the benefit in the current financial year. Thus, UPS should capitalize the cost of conversion.