A business paid $3 500 to have a new engine fitted in an old delivery van. This extended the van's useful life by 3 years. How should this be classified?
Question 1 Report
A business paid $3 500 to have a new engine fitted in an old delivery van. This extended the van's useful life by 3 years. How should this be classified?
Answer Details
The correct answer is Capital expenditure.
Capital expenditure includes spending that significantly extends the useful life of a non-current asset or substantially improves its performance. Fitting a new engine for $3 500 extended the van's useful life by 3 years, which means the expenditure provides benefits over multiple future accounting periods. This enhancement goes beyond routine maintenance and is therefore capitalised.
Revenue expenditure covers day-to-day running costs or repairs that merely maintain the asset in its current condition without extending its life. Capital receipt and revenue receipt relate to money received, not money spent, so neither applies here.
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