Problem 6 - Accounting

Question

Easy Move Company made the following expenditures on one of its delivery trucks: Feb. 16. Replaced transmission at a cost of \(3,150. July 15. Paid \)1,100 for installation of a hydraulic lift. Oct. 3. Paid $72 to change the oil and air filter. Prepare journal entries for each expenditure.

Step-by-Step Solution

Answer

Replace transmission and install lift as capital expenditures; change oil and filter as revenue expenditure.

Step 1: Analyze the Type of Expenditure

Determine whether each expenditure is a capital expenditure or a revenue expenditure. A capital expenditure improves or enhances the asset, increasing its useful life or production capacity, while a revenue expenditure is a routine cost necessary to keep the asset operating at its current level. Replacing the transmission and installing the hydraulic lift are capital expenditures. Changing the oil and air filter is a revenue expenditure.

Step 2: Journal Entry for Transmission Replacement

Record the replacement of the transmission as a capital expenditure. This will be added to the truck's asset account.\[\text{Feb. 16:} \quad \text{Debit: Truck Asset Account } \\(3,150 \quad \text{Credit: Cash } \\)3,150\]

Step 3: Journal Entry for Hydraulic Lift Installation

Record the installation of the hydraulic lift as a capital expenditure, which will also be added to the truck's asset account.\[\text{July 15:} \quad \text{Debit: Truck Asset Account } \\(1,100 \quad \text{Credit: Cash } \\)1,100\]

Step 4: Journal Entry for Oil and Air Filter Change

Record the oil and air filter change as a revenue expenditure. This is recorded as a maintenance expense.\[\text{Oct. 3:} \quad \text{Debit: Maintenance Expense } \\(72 \quad \text{Credit: Cash } \\)72\]

Key Concepts

Capital Expenditure

When a company spends money on things that improve an asset's long-term value, it is known as a capital expenditure. These expenditures usually enhance an asset’s useful life, efficiency, or capability. Let's think of this like renovating your house to add extra rooms or make it more energy-efficient. In the case of Easy Move Company, replacing the transmission and installing a hydraulic lift are capital expenditures.

These improvements add value to the delivery truck and help increase its productivity and lifespan. These enhancements also mean the company can potentially save money over the long term by avoiding frequent repairs.
Since the items improve the overall worth of the truck, they are added to the truck's asset account, just like increasing the value of your house in your financial records.

Revenue Expenditure

Revenue expenditures are everyday expenses necessary to keep an asset in working condition. Imagine daily necessities like buying groceries to stock your fridge—it doesn’t increase the value of your home but keeps everything running smoothly. For Easy Move Company, changing the oil and air filter on the delivery truck is a revenue expenditure because it's a routine maintenance task.

These expenditures help in preserving the existing condition and functionality of the asset. Unlike capital expenditures, they do not enhance or extend the life of the asset.

• They are usually smaller and more frequent.
• Recorded as maintenance or operating expenses.

This approach ensures the truck continues to operate, allowing the business to earn revenue without interruption.

Asset Management

Asset management involves managing a company's valuable items, such as equipment, buildings, and vehicles, which help in generating revenue. It's similar to taking care of all your possessions, ensuring they last longer and perform well. For Easy Move Company, efficient asset management includes making decisions about capital and revenue expenditures for their trucks.

Proper asset management strategies ensure:

• Timely maintenance checks to avoid asset breakdowns.
• Wise investment in upgrades to enhance efficiency.
• Effective tracking and documentation of all expenditures.

This practice aids in maximizing the asset's returns while minimizing costs, ensuring the long-term financial health of the business.

Financial Accounting

Financial accounting is the process of recording, summarizing, and reporting the financial transactions of a company. It gives a clear picture of a company's financial health and performance. Think of it as a diary that keeps track of all monetary activities, like Easy Move Company's truck expenditures.

This reporting includes:

• Documenting all income and expenses.
• Maintaining detailed records of both capital and revenue expenditures.
• Preparing financial statements for internal use and regulatory requirements.

Through proper financial accounting, Easy Move Company can assess whether their spending on truck maintenance and upgrades aligns with their financial goals and budgets. It plays a crucial role in strategic decision-making, helping the company allocate resources efficiently.