Question

Explain how you would decide whether to record each of the following expenditures as an asset or an expense. Assume all items are material.

a) Legal fees paid in connection with the purchase of land are \(1,500.

b) Eduardo, Inc. paves the driveway leading to the office building at a cost of \)21,000.

c) A meat market purchases a meat-grinding machine at a cost of \(3,500.

d) On June 30, Monroe and Meno, medical doctors, pay 6 months' office rent to cover the month of July and the next 5 months.

e) Smith's Hardware Company pays \)9,000 in wages to laborers for construction on a building to be used in the business.

f) Alvarez's Florists pays wages of $2,100 for the month an employee who serves as driver of their delivery truck.

Short answer

a) Asset

b) Asset

c) Asset

d) Expense

e) Asset

f) Expense

Step-by-step solution

Definition of Asset

It refers to the economic value held or controlled by an individual or business firm to get benefits in the future. It is the capitalized item that helps to generate income in nearby future. For example:building, land, inventory, debtors, etc.

Explanation for specific treatment

1. Legal expense is the cost incurred by the business firm for buying land, and thus it will be debited to the land account.
2. The amount spent on the driveway is the amount that provides benefits for the long period and thus capitalized to the land improvement account.
3. Meat grinding machine is the capital expenditure for the meat market and contributes to earning more revenues for many years. Thus, it is an asset.
4. The duration of the office rent paid is less than a year and thus treated as an expense.
5. Wages paid by the business firm for building construction provide benefits for many years and are thus treated as an asset.
6. It is an operating expense as payment of salary is a revenue expenditure.