Question

Indicate which of the following costs should be expensed when incurred. a. $13,000 paid to rearrange and reinstall machinery. b. $200,000 paid for addition to building. c. $200 paid for tune-up and oil change on delivery truck. d. $7,000 paid to replace a wooden floor with a concrete floor. e. $2,000 paid for a major overhaul on a truck, which extends the useful life.

Answer 1

The answer is c.$200 paid for tune-up and oil change on delivery truck.

Step-by-step explanation:

In the question, it is essential to identify whether a money amount paid for the operating/upgrading of fixed asset is recorded as cost or is allowed to be capitalized ( i.e recorded as increment in asset's value).

In general, when a money amount consumed on fixed asset has not been used-up within an accounting period and it is not part of frequent maintenance, for example for improving the quality thus the value of the asset and/or extending its useful life; put the asset to new position required for future production, then the amount should be capitalized to keep the new value of the asset up-to-date.

While cost incurred due to normal course of asset's operation and does not help to improve the asset's value, useful life, should be recorded as cost.