Multiple Choice
Which of the following best describes the purpose of adjusting journal entries for prepaid expenses at the end of an accounting period?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which of the following subsequent expenditures related to a long-term asset would NOT be capitalized?
A
Major improvements that extend the asset's useful life
B
Routine maintenance and repairs
C
Upgrades that enhance the asset's value
D
Additions that increase the asset's capacity
Verified step by step guidance1
Understand the concept of capitalization: Capitalization involves recording an expenditure as an asset on the balance sheet rather than as an expense on the income statement. This is typically done for costs that provide future economic benefits.
Identify the types of expenditures that are capitalized: Expenditures such as major improvements, upgrades, and additions are capitalized because they either extend the useful life of the asset, enhance its value, or increase its capacity.
Recognize the nature of routine maintenance and repairs: Routine maintenance and repairs are recurring costs that do not provide future economic benefits beyond the current period. These costs are expensed immediately on the income statement.
Compare the options provided: Major improvements, upgrades, and additions all meet the criteria for capitalization, as they provide long-term benefits. Routine maintenance and repairs, however, do not meet these criteria and are not capitalized.
Conclude that routine maintenance and repairs are the expenditures that would NOT be capitalized, as they are treated as expenses rather than assets.
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