Distinguish between capital and revenue expenditures, and explain how they are treated in accounting, using a computer as an example. Discuss lump sum purchases and materiality.

When the cost of a long-lived asset is capitalized, it means the expenditure is recorded as an asset on the balance sheet rather than being expensed immediately on the income statement. This cost is then systematically allocated over the asset's useful life through depreciation.

A capital expenditure increases the value of an asset, extends its useful life, or improves its capacity, providing benefits over multiple accounting periods. It is recorded as an asset. A revenue expenditure only benefits the current accounting period, maintaining the asset in its current condition, and is expensed immediately.

For a computer purchased for business use:

• Capital expenditures include the initial purchase price of the computer, shipping costs, and installation fees.
• Revenue expenditures include annual antivirus software subscriptions, routine cleaning supplies, and minor repairs like replacing a mouse.

A lump sum purchase means a company buys multiple assets, such as land and buildings, for a single, combined price. The acceptable accounting manner is to allocate the lump sum cost to each individual asset based on their relative fair market values at the time of purchase.

The concept of materiality affects the recording of expenditure by allowing immaterial items (those too small to influence a financial statement user's decision) to be expensed immediately, even if they technically meet the criteria for capitalization. This simplifies accounting without significantly distorting financial reports.

The three criteria to determine whether a replacement part for equipment is considered a capital expenditure are:

• Does it extend the useful life of the asset beyond its original estimate?
• Does it increase the operating efficiency or capacity of the asset?
• Does it improve the quality of the asset's output?

When one long-lived asset is exchanged for another, the cost of the newly-acquired asset is generally determined by the fair value of the asset given up plus any cash paid, or the fair value of the asset received, whichever is more clearly determinable. If the exchange lacks commercial substance, the new asset is recorded at the book value of the asset given up, plus any cash paid.

Depreciation is the systematic allocation of the cost of a tangible long-lived asset over its estimated useful life. It is an accounting method used to expense the cost of an asset over the period it is expected to generate revenue.

I agree. The value of benefits from a long-lived asset, such as a car, may not be the same in the first years as in later years. A new car typically provides higher reliability, efficiency, and prestige in its early years, leading to greater economic benefits. As it ages, maintenance costs may increase, and its performance or appeal might decrease, reducing the benefits derived.

For a new sports car, a usage-based method (e.g., units-of-production based on mileage) is generally preferable for recording depreciation. This is because the wear and tear, and thus the decline in value, of a sports car is often more directly related to how much it is driven (its usage) rather than simply the passage of time.

Using the declining balance method, the carrying amount of an asset decreases more rapidly in the early years of its useful life and more slowly in later years. With the straight-line method, the carrying amount decreases by a constant amount each period, resulting in a steady, linear decline over its useful life.

The double-declining balance rate of depreciation for an asset with a ten-year useful life is calculated as:

Partial-year depreciation expense is calculated by determining the full year's depreciation amount and then multiplying it by the fraction of the year the asset was in service. For example, if an asset was used for 7 months in a year, the partial-year depreciation would be $\frac{7}{12}$ of the full year's depreciation.