Per Company Policy, Tools With A Purchase Price Greater Than $1,000 Are Capitalized. What's The Correct Entry To Record A Tool Purchase Of $500?

Answer Of Multiple Choice Question (MCQ)

The correct answer is (E). as it is the company’s policy to capitalize tools when its purchase price is more than $1000. So we did not add the cost of tools to Fixed Asset rather than we charge the expense  to income statement i.e., it is a Revenue Expenditure but not a Capital Expenditure.

All the capital expenditures are added to the costs of fixed assets while all the revenue expenditures are charged to expense for the current accounting period and therefore, these are not added to the costs of fixed assets.

So, if the purchase price of tools is greater than $1000 let’s say $1200, then we record the entry by a debit to Fixed Asset (Tools) of $1200 and a credit to Cash of $1200.

You May Also Be Interested In “What happens if Capital Expenditure is treated as Revenue Expenditure?”

A capital expenditure is added to the cost of a Non Current Asset over the years i.e., more than one year based on estimated useful life while a revenue expenditure is charged to expense in profit and loss account for the current accounting period i.e., equal to or less than one year.ads