Question

Describe the costs that would be included in recording the acquisition costs of the following. Ignore interest for this question. We will get to that below.

a) Land

b) Buildings

c) Equipment

d) Self-constructed assets

e) Describe how a firm accounts for interest incurred associated with the construction of PPE during construction. Just provide a conceptual overview, we will get to a comprehensive example next.

Answer 1

(A) Acquisition cost of Land Include below stamp duty charges, brokerage to estate agent and all other expenses related to acquiaiton of land.

(B) Bulding: Stamp Duty Charges, Brokearge to state agent, entry fees to Society , Insurance expense(if any) and all related costs.

(c) Equipment: Installation Charges, Pre testing Charges, Labour charges for testing, Insurance on way to factory and all the cost which associated to bring the equipment in put to use situation.

(d) Self Constructed Assets: Labour, Material, Freight paid on material,fees paid for authority approvals and each and every expense on constructed asset untill it is ready to use should be included in acquisition costs.

(e) Firm can Capitalise all the borrowing cost to the qualifying asset untill it ready to use as per GAAP.

If a company had an asset which qualify the quality of qualifying asset then it should be capitalise the interest cost.

If Interest is on the loan which is specifically taken for the asset then whole interest should be capitalised. However in general borrowings computation required for interest to be capitalised and which portion of interest to be expensed off.