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Capital Versus Operating Expenditures

A company buys an automobile it expects to use for 60,000 miles. The company knows that it will have to perform repairs and maintenance during that time. Each routine repair maintains the ability of the car to last for 60,000 miles, but does not extend its life beyond the 60,000 miles. In addition, the company might decide to buy a new engine for the car at 50,000 miles so that the car can be used for another 30,000 miles.

Is the purchase price, repairs, and replacement engine for the automobile recorded as capital expenditures or as expenses? Please explain.

Solution Preview

A company buys an automobile it expects to use for 60,000 miles. <-- the purchase of the auto is a capital expense, it is considered a capital asset.

The company knows that it will have to perform repairs and maintenance during that time. <-- we would expect to find this on all assets.

Each routine repair maintains the ability of the car to last for 60,000 miles, but does not extend its life beyond the 60,000 miles. <-- this is an operating expense.

In ...

Solution Summary

This solution explains if the purchase price, repairs, and replacement engine for the automobile should be recorded as capital expenditures or as expenses.

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