In the context of asset impairments, how should the purchase of a new firewall device be classified?

• A. As a capital expenditure, since it is an acquisition of a long-term asset
• B. As an impairment loss, since it reduces the value of existing assets
• C. As a routine operating expense, since it is a recurring cost
• D. As a depreciation expense, since it allocates the cost over time

Answer: (A)

Verified step by step guidance

1. Understand the concept of asset impairments: Asset impairments occur when the carrying amount of an asset exceeds its recoverable amount, leading to a reduction in its value. This is different from the classification of expenditures related to acquiring new assets.
2. Review the definition of capital expenditure: Capital expenditures are costs incurred to acquire or upgrade long-term assets, such as equipment, buildings, or technology, which provide benefits over multiple accounting periods.
3. Analyze the nature of the purchase: The purchase of a new firewall device is an acquisition of a long-term asset that will provide security benefits over time, rather than being a recurring or routine cost.
4. Compare the options provided: Evaluate each classification option (capital expenditure, impairment loss, routine operating expense, depreciation expense) and determine which aligns with the nature of the purchase.
5. Conclude the classification: Based on the analysis, classify the purchase of the firewall device as a capital expenditure, as it represents the acquisition of a long-term asset rather than an impairment loss, operating expense, or depreciation expense.