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Answer :
Final answer:
Revenue expenditures, like the repair, maintain an asset's earning capacity without affecting its book value. However, capital expenditures, like installing a new roof, improve the asset's earning capacity, thus they are added to the asset's book value. The new book values are $4,840 for the tow truck and $98,700 for the building.
Explanation:
Distinguishing between revenue expenditures and capital expenditures is crucial in understanding the financial aspects of a business. In the case of Bill's Wrecker Service, the minor repair on the tow truck, costing $1,170, is a revenue expenditure, totalling the truck's book value to $6,010. This cost is treated as an expense, and does not affect the book value of the asset, so the tow truck's book value remains the same at $4,840.
On the other hand, the cost to replace the roof, $7,500, is a capital expenditure as it has extended the useful life of the building. So the expenditure for the roof replacement is added to the building's book value. Therefore, the building's book value will now be $98,700, calculated as the initial book value of $51,600 ($91,200 - $39,600 of accumulated depreciation) plus the capital expenditure of $7,500.
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