Acquiring Long-Term Assets

Concept

Capitalization vs. Expensing

Costs that provide benefit beyond the current period are CAPITALIZED (added to the asset). Costs that only benefit the current period are EXPENSED immediately. The capitalized cost becomes the asset's historical cost basis for depreciation.

Example

What Gets Capitalized?

Purchase price, sales tax, freight-in, installation, site preparation, and testing costs are all capitalized. Routine maintenance, repairs, and training costs are expensed. A $200,000 machine with $5,000 delivery, $3,000 installation, and $2,000 testing has a capitalized cost of $210,000.

Key Point

Lump-Sum Purchases

When multiple assets are purchased together for a single price, allocate the cost based on relative fair market values. Example: Land and building for $500,000 — if land is appraised at $200,000 and building at $300,000, allocate 40% to land and 60% to building.

Depreciation Methods

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Practice questions from this module to reinforce what you learned.

Practice Questions