Financial Accounting – Chapter 9 – Capitalization vs. Expense


Hello this is Connie Belden, and I want
to take a look at an illustration in the book as we talk about what we can
capitalize and what we need to expense. This diagram in your book includes a
list of what you can capitalize, and by capitalized I mean you can add it on to
the cost of the asset. So for building I can actually add all of these on as a
debit to building, so for example if the building cost of $100,000 and I
had 10,000 and architect fees that puts me at $110,000 as a debit to building. If
I paid another 5,000 and engineering fees that puts me as a debit to building
at $115,000. Insurance costs while it’s being constructed, only interest while it’s
being constructed, sales tax, if you buy an existing building and have to do some
repairs before you initially get it up and running for use that can be debited
to building, after it’s being used it would be a repair expense. Any
modification again before you use it and permits for machinery and equipment same
thing, you could take what you paid for that piece of equipment, you can add to
it any sales tax, freight, or shipping, any installation costs that you have in
order to initially get it up and running. If you buy a used piece of equipment and
it repairs again just to initially get it up and running after that it’s a
repair expense. Insurance while it’s in transit, if you have to pay assembly to
get it initially up and running, any modifications or testing to get it
initially up and running can all be debited to equipment. Now land you could take the purchase price add sales tax permits, brocker fee would be
the same as if you paid a realtor commission, any title or surveying fees,
it might have to be done to purchase it any delinquent property taxes owned by
the previous owner would have to be paid before you bought it so if you paid
those that could be debited to land. Something
I want to talk about here is notice it says removal of unwanted building less
any salvage, so if the land currently has a building on it that you’re gonna tear
down you put the entire purchase price to land because you’re not keeping the
building, so anything you need to do to get that land ready for use
goes to land. So if you have to tear down an old building that goes to land,
grading and leveling that has to go to land, and then we’re adding a new asset
category land improvement that would be for like trees, shrubs or bushes,
fences, outdoor lighting, parking lot, or walkways. Okay let’s take a look at an
example: So fees pay to an attorney for a search
and then notice in “B” that we did buy a piece of land with a building, but notice
it says a building is going to be demolished, so therefore we are buying
this land for the building, so therefore the attorney and title search of $3,600
notice I did put it here to land. Next we did purchase the land which is valued at
720 and the building at 60, now again we’re not keeping the building we’re
tearing it down so we bought it for the land, so I’m gonna put the entire seven
hundred and eighty thousand here notice I put the entire seven hundred and
eighty thousand to land. Now if I were gonna keep the building and renovate
it, then I would put seven twenty to land and 62 to building, and just add to the
building account as a debit any additional renovation cost.
Okay I’m gonna skip down to some of these that are a little bit trickier
such as cost to remove the building purchase in “B”, notice that says ten
thousand, so letter F that ten thousand again should go to land because that was
a cost of tearing down the building to get the land ready for the future
building. Then we did receive some salvage some
money from the salvageable materials from the removal of the building, maybe it was
some scrap metal, so that would be some money we received back on it,
so therefore notice I took $3,400 away from land. Notice I have an other
accounts of category, that’s for when it doesn’t go to land land improvement or
building, that’s also where we go if it would need to be an expense like a
repair done after a building is already in use. So we haven’t paid for the
building yet, but we did take out an eight hundred thousand dollar loan so
therefore that would actually be a notes payable, so therefore I wrote it in as a
minus 800 because think of other accounts as having a debit balance. Okay
besides any repairs that are done after the building is in use if you have any
wind storm damage or vandalism which we did for three thousand and two thousand,
that stuff that shouldn’t have happened, that’s some additional expenses so
notice that I did put that under other accounts. I would count that as repair
expenses. Then and letter “Q”, I did get some insurance money back on it so I
subtracted it out. So I suggest you look through the rest of this illustrative
problem 9-1B and then work the rest of it. You can find in the e-book under
B Set problems and go through that before you do your homework. I just
wanted to hit on some of the highlighted items.

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