A long-term commitment of a large sum of money to buy new equipment or replace old equipment is called

• A. Operating Expenses
• B. Depreciation
• C. Capital Expenditures
• D. Interest Expense

Answer: (C)

Capital expenditures are long-term investments in fixed assets. When a business commits a large sum to buy new equipment or replace old machinery, it is making a capital expenditure because the asset will be used for several years to help produce revenue. This differs from operating expenses, which cover ordinary costs of running the business in the current period and are expensed immediately. The cost of the asset is recorded on the balance sheet as property, plant, and equipment and is gradually recognized as depreciation over the asset’s useful life. Interest expense, on the other hand, comes from borrowing to fund the purchase and is a financing cost, not the asset itself. So the scenario described fits capital expenditures.