Chapter 8, Problem 1DQ

To determine

Discuss the meaning of capitalizing the expenditure and the factor which determines whether expenditure can be capitalized.

Explanation of Solution

Capitalization of costs:

Capitalization of costs are considered as the part of fixed assets instead of stating them as expenses during the period in which they are incurred and capitalized costs are identified over a period of time through amortization or depreciation of fixed asset. These costs are incurred to extend the useful life, production capacity, and operating efficiency of the asset. These costs do not recur and are capitalized by increasing the cost of the asset on the balance sheet.

Factor determining whether the expenditure can be capitalized:

The factor which determines whether the expenditure can be capitalized is the future economic benefit. If the expenditure provides benefit even after the end of the current accounting period, then such expenditure can be capitalized. If the benefit provided by the expenditure is used up before the end of the current accounting period, then such expenditure should be expensed.