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

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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.

QUESTION 1:
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

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