Question

Novak Reclaimers entered into a contract with Splish Demolition to manage the processing of recycled materials on Splish various demolition projects. Services for the 3-year contract include collecting, sorting, and transporting reclaimed materials to recycling centers or contractors who will reuse them. Novak incurs selling commission costs of $2,070 to obtain the contract. Before performing the services, Novak also designs and builds receptacles and loading equipment that interfaces with Splish demolition equipment at a cost of $28,230. These receptacles and equipment are retained by Novak and can be used for other projects. Splish promises to pay a fixed fee of $12,510 per year, payable every 6 months for the services under the contract. Novak incurs the following costs: design services for the receptacles to interface with Splish equipment $2,710, loading equipment controllers $6,150, and special testing and OSHA inspection fees $2,070 (some of Splish projects are on government property). Determine the costs that should be capitalized as part of Novak Reclaimers revenue arrangement with Splish Demolition. (If answer is 0, please enter 0. Do not leave any fields blank.) Commission Costs $ Design Services $ Cost of loading Equipment Controllers $ Inspection Fees $ Receptacles and loading Equipment $ Splish also expects to incur general and administrative costs related to this contract, as well as costs of wasted materials and labor that likely cannot be factored into the contract price. Can these costs be capitalized?

Answer 1

As per GAAP and standard given by the board,

The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:

(a) it is probable that future economic benefits associated with the item will flow to the enterprise; and

(b) the cost of the item can be measured reliably.

element of cost as follow as :-

(a) its purchase price, including import duties and non –refundable purchase taxes,, after deducting trade discounts and rebates.

(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management.

(c) the initial estimate of the costs of dismantling, removing the item and restoring the site on which it is located, referred to as ‘decommissioning, restoration and similar liabilities’, the obligation for which an enterprise incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.

18. Examples of directly attributable costs are:

(a) costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from the construction or acquisition of the item of property, plant and equipment;

(b) costs of site preparation;

(c) initial delivery and handling costs;

(d) installation and assembly costs;

(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition (such as samples produced when testing equipment); and

(f) professional fees.

so cost should will be captilased -

1 selling commission costs of $2,070

2 designs and builds receptacles and loading equipment

3.designs and builds receptacles and loading equipment

4. interface with Splish equipment $2,710

5.equipment controllers $6,150

6. pecial testing and OSHA inspection fees $2,070(upto allocaton to that project)