6. For each of the following situations decide whether the expenditure should be
ID: 2585051 • Letter: 6
Question
6. For each of the following situations decide whether the expenditure should be recognized as an asset or as an expense and explain why. Assume that all amounts are material to the company.
a. Legal fees paid in connection with the purchase of land totaled $25,000.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
b. A company paves the driveway leading to the office building at a cost of $32,000.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
c. A company purchases a machine at a cost of $47,000.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
d. On February 1, 2017, partnership pays 6 months of office rent to cover February and the subsequent 5 months.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
e. A company pays $120,000 wages to employees for construction on a building to be used in their own business.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
f. A company pays wages of $5,000 for the month to an employee who serves as the driver of their long-haul delivery truck.
Recognize as an asset or an expense: _________________________________________________
Rationale: ______________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________
Explanation / Answer
a. Legal fees paid in connection with the purchase of land totaled $25,000.
Recognize as an asset or an expense: Asset.
Rationale: All cash outlays for bringing an asset into existence are to be added to the cost of the asset and capitalized. Legal fee incurred in connection with the acquisition of land is to be added to the cost of land and hence is an asset.
b. A company paves the driveway leading to the office building at a cost of $32,000.
Recognize as an asset or an expense: Asset:
Rationale: It is an improvement of the property as a result of which its value would increase.
c. A company purchases a machine at a cost of $47,000.
Recognize as an asset or an expense: Asset.
Rationale: The machine is to be used in the business over its useful life and hence is an asset.
d. On February 1, 2017, partnership pays 6 months of office rent to cover February and the subsequent 5 months.
Recognize as an asset or an expense: Asset.
Rationale: It is an advance payment for which the benefit would be received in future. It would be named prepaid expense.
e. A company pays $120,000 wages to employees for construction on a building to be used in their own business.
Recognize as an asset or an expense: Asset.
Rationale: It is an expenditure to bring the asset into existence.
f. A company pays wages of $5,000 for the month to an employee who serves as the driver of their long-haul delivery truck.
Recognize as an asset or an expense: Expense.
Rationale: It is a cash outlay for operating an asset for its intended use.
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