Student 1(destinee): Would Stellar capitalize or expense the cost of the robotic pizza-making machine? Capitalize, it is purchased and used over a period of time.
Would Stellar capitalize or expense the cost of the truck to house the robotic pizza-making machine? Capitalize, the truck is being used in conjunction with the robotic pizza-making machine over time.
Would Stellar capitalize or expense the cost of the ingredients used to top the pizzas (i.e., pepperoni, mushrooms, onions, and cheese)?
The pizza ingredients would be expensed since they will be used in full until the next order is placed and will last a short duration of time.
If Stellar needs to replace the controller cables after the robotic machine is used for 2,000 hours, is the cost of those controller cables capitalized or expensed by Stellar?
Why does it matter? If the controller cables for the robotic machine but be replaced after being used for 2,000 hours or about 83 days, the cost would be expensed since the purchase lasts a short period of time and must be made frequently throughout one year.
This matters because of how capitalizing and expensing can affect a firm’s assets.
What is the impact of capitalizing an item on the balance sheet? Capitalizing on a balance sheet will show the expense as an asset that is depreciated or amortized.
On the income statement? On the income statement a capitalized purchase will reflect as an expense upon purchase.
What is the impact of expensing an item on the balance sheet? The balance sheet is affected with an increase in their liabilities or outstanding payments and with a decrease in equity or retained earnings.
On the income statement? Expensing an item will show as a decrease in profit on the income statement.
Student 2 (hunter): 1) The cost of the robotic pizza-making machine should be capitalized because the equipment’s life is over one year to a long period and the usage of the equipment should be consumed through the depreciation expense.
2) The cost of the truck to house the robotic pizza-making machine also be capitalized as being a long life over one year and the expense of the truck is consumed as depreciation.
3) The cost of the ingredients used to top the pizza is the variable expense and taken as an expense as and when consumed.
4) The cost of the controller cables which are replaced after use for 2000 hours should be taken as an expense because the cable is replaced every year and its services are consumed as and when replaced.
5) The capitalization of an item is carried-forward to the next year in the Balance Sheet at its book value (Cost price – Accumulated depreciation). The services for a year are consumed under the Income Statement through the depreciation expense, as the capitalized item is absorbed over its life period.
6) The impact of expensing an item on the balance sheet is on the shareholders’ equity which reduces on observing an expense. The income statement is impacted as the net income reduced as the expense is observed. The expense is put against the revenues to have net income or loss under the income statement.