7.2 Learning Objective 7-2
1) The distinction between a capital expenditure and an expense can be difficult to determine for a plant asset.
2) Costs that extend a plant asset's useful life should be capitalized.
3) Costs that do not extend a plant asset's capacity or its useful life, but merely maintain the asset or restore it to working order are recorded as:
A) capital expenditures.
B) expenses.
C) extraordinary repairs.
D) modification of assets.
4) Which of the following costs associated with a delivery van should NOT be capitalized?
A) The van's engine is overhauled and this will extend the useful life by five years.
B) The van's transmission is overhauled and this will extend the useful life by two years.
C) The van is repainted.
D) The van is modified so the van can be used for multiple purposes in the business.
5) The journal entry to record an addition to an office building would include:
A) credit to Depreciation Expense.
B) credit to Accumulated Depreciation.
C) debit to Repair Expense.
D) debit to Office Building.
6) Pat's Pets recently paid to have the engine in its delivery van overhauled. The estimated useful life of the van was originally estimated to be 4 years. The overhaul is expected to extend the useful life of the van to 10 years. The overhaul is regarded as a(n):
A) revenue expenditure.
B) capital expenditure.
C) equity expenditure.
D) matching expenditure.
7) Capital expenditures are not immediately expensed because these items:
A) extend the useful life of a plant asset.
B) return a plant asset to its prior condition.
C) decrease the plant asset's capacity.
D) maintain a plant asset in working condition.
8) Morgan Oaks Company replaced the windshields and painted several of its vehicles during the year. These costs should be:
A) debited to Equipment.
B) depreciated over the life of the vehicles.
C) credited to Accumulated Depreciation.
D) debited to Repair Expense.
9) On June 1, Roadway's Trucking Company paid $3,000 to overhaul the engine on a delivery truck to allow it to be used for two additional years. It also paid $7,500 changing the storage capacity of the truck so that it could haul more merchandise. Which of the following statements is TRUE?
A) The $3,000 is a capital expenditure and the $7,500 is an expense.
B) The $3,000 is an expense and the $7,500 is a capital expenditure.
C) Both items are capital expenditures.
D) Both items are expenses.
10) Treating a capital expenditure as an immediate expense:
A) overstates assets and stockholders' equity in the year of the error.
B) understates assets and stockholders' equity in the year of the error.
C) understates assets and overstates stockholders' equity in the year of the error.
D) overstates assets and understates stockholders' equity in the year of the error.