Case 7-2 - Joan Holtz(C) - Accounting

Topics: Depreciation, Building, Construction Pages: 9 (2365 words) Published: December 6, 2011
CASE 7-2. Joan Holtz(C)

Joan Holtz said to the accounting instructor,” The general principal for arriving at the amount of a fixed assets that is to be capitalized is reasonably clear, but there certainly are a great many problems in applying this principle to specific situation.

1.Suppose that the Bruce Manufacturing Company used its own maintenance crew to build an additional wing on its existing factory building. What would be the proper accounting treatment for the following treatment of the following items?

Question 1-a

Architects’ fees should be capitalized. Architect is employed to seek planning and building approvals from the relevant authorities before a building project can be implemented. (These are all ‘one-time costs’ incurred for making the place ready for construction hence, to be capitalized). Capital expenditures include those for building improvements or other long-term betterments, new equipment, architect's fees even the cost of defending or perfecting title to property. Capital expenditures also include amounts paid to improve equipment or property already owned. Examples of construction costs include, but are not limited to, building materials, architects’ fees, building permit fees, subcontract fees, rent for property, other than real property, to complete construction, operating and maintenance costs for property used in the construction, site preparation, compensation for work performed, and cost of supplies consumed in the construction. Capitalization takes place during the completion of the project.

Question 1-b.

Snow removal costs should be capitalized (include costs for materials, such as salt bags and calcium bags and sometimes need to use snow removal using trucks).

Question 1-c.

Cash discounts earned should be capitalized(consider as a reduction in the cost of the assets). Many companies automatically take advantage of these discounts as a matter of policy because of the high rate of interest earned. If didn’t accept the cash discount. The other view is that failure to take the discount should not be considered a loss, because the terms may be unfavorable or the company might not be prudent to take the discount.

Question 1-d.

The cost of building a combined construction office and tool shed should be capitalized in the asset account. (including direct costs, labor) associated with the construction project shall be included in establishing the asset valuation). Buildings and other construction are first accounted for as construction in progress. When the construction is at least 90% complete or the construction has been certified as substantially complete, the construction is removed from construction in progress and accounted for as buildings or other.

Question 1-e.

Interest on money borrowed to finance construction should be capitalized. The amount of interest capitalized is the amount related to borrowings made to finance the project. The total amount of interest capitalized cannot exceed the company’s total interest cost of the period. The interest capitalization period ends when the assets is substantially complete and ready for its intended use.

Question 1-f

Local real estate taxes should be capitalized and depreciated. For tax purposes, it is a cost which cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question.

Question 1-g

Cost of mistakes made during construction should be treated as expenses. (The share of these costs attributed directly to the construction are to be capitalized to the construction.)

Question 1-h

Overhead costs of the maintenance department should be capitalized. All costs of preparing assets for use should be capitalized. Employee...
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