Question

What must accountants consider when determining whether to capitalize the costs incurred subsequent to the acquisition of long-term assets? Are all gains recognized when assets are disposed of either through exchange or sale or conversion? Why or why not? Are all losses recognized?

What should be recorded as a cost upon acquisition of plant, property, and equipment? What if these assets are acquired with something other than cash? How are they accounted for? Give examples, such as stock, contributions, other assets, etc.

Answer 1

To capitalize cost, a company must derive economic benefit from assets beyond the current year and use the items in the normal course of its operations. For example, inventory cannot be a capital asset since companies ordinarily expect to sell their inventories within a year.

Because capitalized costs are depreciated or amortized over a certain number of years, their effect on the company's income statement is not immediate and, instead, is spread out throughout the asset's useful life. Usually, the cash effect from incurring capitalized costs is immediate with all subsequent amortization or depreciation expenses being non-cash charges.