Question

Indicate if you would capitalize or expense each of these items. What account would you debit for each? Oil change on a company truck. Replaced the roof on a building. Overhaul of a truck motor. One year extension in useful life is expected. Patched one pothole in the parking lot. Replacement of worn-out gears on factory machinery. (Gears need to be replaced every three months). Construction of a new wing on an office building.

Answer 1

Items which are needed to be capitalised :

1. Replaced the roof of a building.

Such mount is needed to be capitalised as it is not a normal type of expense and it is not incurred on frequently basis. It is a one time expenses and it is to be capitalised.
The amount which is to be debited is the expenses incurred on the roof of the building.

2. Overhaul ofa truck motor.

It is to be capitalised as such an overhauling of the truck motor would increase its useful life by one year and also it is a one time expense.
The amount debited should be the expenses incurred on overhauling of such truck.

3. Construction of a new wing on office building.

As such this new wing would increase the efficiency of the workings and also it is a one time expense. So this should be capitalised.
Debited amount should be all the costs incurred.

Items which are to be considered as expenses and are not to be capitalised :

1. Oil change on a company truck.

It is to be considered as a General expense, as it is a reoccuring expense. So it should be considered as an expense and should not be capitalised.
Amount debited should be oil change amount plus service charges.

2. Patch of one pothole in the parking lot.

It is also a type of general expense even though it is not incurred frequently.
Amount debited should be all the expenses incurred.

3. Replacement of worn-out gears on factory machinery.
Such replacements are done frequently and are reoccuring expense, so they should not be capitalised.
Amount debited should be all the expenses incurred.