Question

At Applebee’s, Presto tablets by E la Carte are being installed at every table. In total, Applebee’s will be purchasing 100,000 tablets. Customers will be able to pay their food bill and order appetizers and desserts using the tablets.

In addition to the initial purchase price of the tablet hardware and various other costs, Applebee’s will be paying E la Carte a subscription fee for the use and upkeep of the tablets.

Data and assumptions

Use the following assumptions for data for this exercise (all figures are assumptions only):

1. Each tablet has an initial purchase price of $250
2. The annual subscription fee per tablet is $50
3. The cost to run wiring to all tables for the tablet is $4,000,000
4. The cost of brackets to attach the tablets to the tables is $3,400,000
5. Initial training of staff on the use of the tablets $5,000,000
6. Additional annual IT costs incurred for tablet maintenance and updates is $225,000
7. The useful life of the tablets is four years. Ignore depreciation and taxes.

Questions

Which of Applebee’s expenditures for the tablets will be expensed? Which will be capitalized?

3-5 sentences preferably if not more. Thank you.

Answer 1

The costs which are directly attributable to getting an asset into its intended working condition should be capitalised. To fulfill the critaria of capitalisation , the cost should be specific of nature, used for the getting the assets ready for intended purpose, majorly one time task not repetitive.

Here the per tablet has an initial purchase price it will be capitalised as an acquisition cost of tablets, but the annual subscription fees of $50 will not be capiatalised as it will be incurred yearly and it does not make the assets to get on its working condition.

Further, the cost to run wiring and cost of brackets to attach the tablets are the installations cost which are incurred to make the assets ready for its intended use, hence this expenses will be capitalised.

further training costs associated with operating an asset do not qualify for capitalisation as it is not intended to make the assets ready for use and further employees are not owned by company , and training is attached to employees not to the tablets so it is not capitalised.

In the same way the annual IT maintainance cost is also not capitalised as it is annual maintainance cost for the smooth run of tablets not an installation cost.

Hence Cost Incurred on 1. Purchase of tablets 2. Cost of running wiring 3.Cost of brackets will be capitalised , = 25000000 + 4000000+3400000 = $32400000.

and Cost incurred on 1. Annual subscription 2 . Initial training of staff 3. Annual IT maintainance will be expensed out , = 5000000+5000000+225000 = $10225000