Capital and Revenue Expenditures

#Capital and Revenue Expenditures

#Capital Expenditures

Are expenditures that improve the operating efficiency (or capacity) or costs incurred to achieve greater future benefits. In addition to the acquisition of plant assets, capital expenditures included additions and betterment. An addition is an enlargement to the physical layout of a plant asset. Suppose for example. if a new wing is added to a building, the benefits from the expenditure will be received over several years, and the amount paid for it should be debited to the asset account. Betterment, on the other hand, is an improvement that does not add to the physical layout of the asset. Installation of an air conditioning system is an example of betterment, Replacement of a concrete floor for a wooden floor is also betterment that will provide benefits over a number of years. so its cost should be charged (debited) to an asset account.

Other types of capital expenditures include extraordinary repairs. Extraordinary repairs are repairs of a more significant nature. They affect the estimated residual value or estimated useful life of an asset. For example, a boiler for heating a building may be given a complete overhaul, at a cost of $3000 that will prolong its economic life by 5 years.

Extraordinary repairs are recorded by debiting the accumulated depreciation account, under the assumption that some of the depreciation
previously recorded has now been eliminated.

The effect of this reduction in the accumulated depreciation account is to increase the book value of the asset by the cost of the extraordinary repair. As a result, the new book value of the asset should be depreciated over the new estimated useful life.

#Revenue expenditures

Revenue expenditures are expenditures incurred in order to maintain the normal operating efficiency of the asset. Among the more usual kinds of revenue expenditures for plant asset are the repairs, maintenance, lubrication, Cleaning and inspection necessary to keep an asset in good working conditions. Ordinary repairs are expenditures that are necessary to keep an asset in good operating conditions. Trucks must have tune-ups. their tires and batteries must be replaced regularly, and other routine repairs must be made. Offices and halls must be painted regularly, and broken tiles or woodwork must be replaced. Such repairs benefits only the current period and therefore must be charged against the revenue in the current fiscal period.

#Natural resources and depletion

We now turn our attention to another group of long-lived assets natural resources, such as minerals, oil, and timber or lumber. These natural resources are extracted from the earth.

Depletion is the accounting measure used to allocate the acquisition cost of natural resources. Depletion differs from depreciation because depletion focuses specifically on the physical use and exhaustion of the natural resources, while depreciation focuses more broadly on any reduction of the economic value of a plant or fixed asset.

The costs of natural resources are usually classified as long-term assets. Depletion expense is the measure of that portion of long-term assets that is used up in a particular period.

#Intangible assets and amortization

Intangible Assets: are long-term assets that do not have physical substance and in most Cases relate to legal rights or advantages held. Intangible assets include patents, copyrights, trademarks, franchises, organization costs, leaseholds, leasehold improvements, and goodwill. The allocation of intangible assets to the periods they benefits is called amortization. Intangible assets are accounted for at acquisition cost, that is, the amount paid for them.

Some intangible assets such as goodwill and trademarks may be acquired at little or no cost. Even though they may have great value and be needed for profitable operations they should not appear on the balance sheet unless they have been purchased from another party at a price established in the market place.

The Accounting Principles Board (APB) has decided that a company should record as assets the costs of Intangible assets acquired from others. However, the company should record as expenses the cost of developing intangible assets. Also, intangible assets that have a determinable useful life such as patents, copyrights. and leaseholds, should be written off through periodic amortization over that useful life in much the same way that Plant assets are depreciated.

Even though some intangible assets, such as goodwill and trademarks, have no measurable limit on their lives, they should also be amortized over a reasonable length of time (not to exceed forty years).

#Illustration
Assume that on Jan 2. 2020 Coca Cola Soft Drink Bottling company purchased a patent on a unique bottle cap for $54,000.

The entry to record the patent would be as follows:
Jan 2 Patent.............$54,000
                Cash...............$54,000
(To record the purchase of Bottle cap)

Assume that Coca Cola's management determines that, although the patent for the bottle cap will last for seventeen years, the product using the cap will be sold only for the next six years. The entry to record the annual amortization would be as follows:

Amortization Exp....$9,000
       Patent.......................$9,000
(To record annual amortization of patent ($54000/ 6 years)

Note that the patent account is reduced directly by the amount of the amortization expense. This is in contrast to other long-term asset accounts in which depreciation or depletion is accumulated in a separate contra account.

If the patent becomes worthless before it is fully amortized, the remaining carrying value is written off as a loss. For instance, assume that after the first two years Coca Cola soft Drink Bottling Company's chief competitor's offers a bottle with a new type of cap that makes Coca Cola's cap obsolete. The entry to record the loss is👇

Loss on patent.....$36,000
         Patent.................$36,000

(To record the losses result from patents becoming worthless.