Question

Which of the following best states the principle that guides whether or not an expenditure should be capitalized (debited to an asset account) when a new asset is acquired?
a. The fair value of the asset less an allowance for normal wear and tear should be capitalized.
b. Purchase prices should be capitalized, but no other costs.
c. All costs necessary to get the asset ready for its intended use should be capitalized.
d. All amounts paid for in cash should be capitalized.

Answer 1

Answer: c. All costs necessary to get the asset ready for its intended use should be capitalized.

Explanation:

All costs that were necessary to get the assets ready to fulfil its purpose should be capitalized. These include, in the case of fixed assets, the cost price, taxes, transportation costs, as well as installation costs.

These costs will be added to the cost of the asset and recorded as such in the financial statements because they contributed to the long term usefulness of the asset.