Final answer:
The correct option is a. air conditioning system.
Capital expenditures are investments in assets that provide benefits beyond the current accounting period. Installing a new air conditioning system or adding a room to a building qualifies as capital expenditures because they enhance the building's value or capacity. Maintenance, minor repairs, and cleaning are considered revenue expenditures, not capital expenditures.
Step-by-step explanation:
When analyzing which expenses related to a building would be classified as a capital expenditure, it's important to distinguish between costs that are for enhancements versus those for maintenance. Capital expenditures are costs that are invested in assets that will have a useful life beyond the current accounting period and will assist in generating future economic benefits. This typically includes the purchase or improvement of fixed assets such as equipment, property, or industrial buildings.
Qualifying Expenses
- Air conditioning system: Installing a new system or making substantial improvements to an existing system would be considered a capital expenditure because it enhances the value or capacity of the building.
- Room addition: Adding a room increases the physical dimensions of the building and its potential usage, qualifying it as a capital expenditure.
On the other hand, expenses such as air conditioning maintenance, minor drywall repair, and carpet cleaning are operational in nature and are considered to be revenue expenditures because they are ordinary, recurring expenses required for the day-to-day maintenance of the asset and do not extend its useful life or enhance its value substantially.