Which costs get capitalized into property, plant, and equipment and which ones are expensed?

Question

AcadiFi · Accepted Answer

Capitalize costs necessary to acquire the asset and place it into service. That includes purchase price, sales tax, freight-in, installation, site preparation, and testing net of proceeds from test runs when GAAP requires. Expense items that do not create future economic benefit tied to getting the asset ready for use, such as employee training, general overhead, start-up inefficiencies, and routine repairs after the asset is in service.

Example: Beacon Ridge Fabrication buys a machine for $420,000. It pays freight of $18,000, installation of $12,000, testing costs of $9,000, and operator training of $6,000. It also spends $14,000 to repair damage after the machine begins production. Capitalized cost is $459,000, which includes the purchase price, freight, installation, and testing. The $6,000 training cost and $14,000 repair expense are period costs, not part of the asset basis.

A good FAR shortcut is to ask whether the cost was necessary to get the machine ready for intended use. If yes, capitalize it. If it relates to people learning the system or maintaining the asset after it is ready, expense it. Later major improvements that extend useful life, increase capacity, or improve efficiency are capitalized, but ordinary maintenance is not. Practice more in our CPA FAR question bank.

Which costs get capitalized into property, plant, and equipment and which ones are expensed?

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