A contractor is developing a business plan and needs to categorize expenses. Which of the following would be considered a fixed asset rather than an operating expense?
Correct Answer
B) Concrete mixer purchased for $25,000
A concrete mixer is a fixed asset because it's a tangible item with a useful life greater than one year that will be used in business operations. The other options are operating expenses that occur regularly.
Why This Is the Correct Answer
A concrete mixer purchased for $25,000 is classified as a fixed asset because it meets all the criteria: it's a tangible piece of equipment, has a useful life extending beyond one year, and will be used repeatedly in business operations to generate revenue. Fixed assets are capitalized on the balance sheet and depreciated over their useful life rather than expensed immediately. This equipment will provide value to the construction business for multiple years through various projects.
Why the Other Options Are Wrong
Option A: Monthly office rent
Fuel costs are operating expenses because they are consumable items that are used up immediately and represent regular, recurring costs necessary for daily business operations.
Option C: Fuel costs for vehicles
Monthly office rent is an operating expense because it's a recurring cost that must be paid regularly to maintain business operations and doesn't result in ownership of any tangible asset.
Option D: Employee wages
Employee wages are operating expenses because they represent ongoing, regular costs of doing business that are expensed in the period they are incurred and don't create any lasting asset value.
Memory Technique
Use the acronym 'DOLT' - Durable (lasts over 1 year), Owned (you have title), Large cost (significant purchase), Tangible (physical item) = Fixed Asset
Reference Hint
Business and Finance for Contractors - Chapter on Accounting Principles and Asset Classification
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