Case 7-2: Joan Holtz (C)

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1. Bruce Manufacturing Company ' self-constructed assets

If the Bruce Manufacturing Company builds an additional wing for its own use, the amount of capitalized cost includes all the costs incurred in construction. These costs include the material and labor directly associated with the project, as well as a fair share of the company’s indirect costs incurred during the construction period.

a. Architects’ fees : Capitalized
b. Snow removal cost : Capitalized

c. Cash discounts earned: Capitalize only the cash payment amount of material purchased for construction. Decrease the capitalized cost of material purchased for construction by the amount of cash discounts earned.

d. Cost of building a combined construction office and toolshed: Capitalized because this is directly associated to the project. e. Interest on money borrowed: Capitalized according to the FASB requirements. f. Local real estate taxes: Expensed because the company is required to pay taxes on the land it owns regardless of construction. g. Cost of mistakes: Expensed because it can’t create future benefits. h. Overhead cost, etc: Overhead cost should be capitalized according to its share in the total department. i. Insurance cost and losses not covered by insurance: Capitalized because directly associated with the construction project.


2. Archer Company ' basket purchase

When the Archer Company bought a large piece of land, two capital assets are to appear in balance sheet category.

a. Should be capitalized on the combined hotel and office building because the entire amount the company paid for the existing building should be considered as a part of new construction cost. b. The demolishing cost is also part of all expenditures that are necessary to make the asset ready for the intended use of constructing a combined hotel and office building so it should be allocated to the cost of land.
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