Joan Holtz ©

Case Study Solution

23/08/2022

A) Architects fee should be capitalized on the additional wing of the factory that is to be built during
the completion of the project.

B) Snow removal costs should be capitalized.

C) Cash discounts earned should be capitalized.

D) The cost of building combined construction office and tool shed should be capitalized.

E) Interest on money borrowed to finance construction should be capitalized.

F) Local real estate taxes should be capitalized and depreciated.

G) Cost of mistakes during construction should be considered as expenses.

H) Overhead cost of maintenance department should be capitalized.

I) Cost of insurance during construction and cost of damage not covered by insurance should be
considered as expenses.

As Archer Company purchased a large piece of land, which currently generate revenue from the
existing building, depreciation is charged. However, as the land was purchased with the intention to
be razed, it is inappropriate to charge the entire amount to depreciation. Therefore, only a portion
of the purchased price is considered.

A) The potion of purchase price for the building that are to be razed, if left out after depreciation

B) Demolishing cost should have allocated or capitalized to the cost of land

C) So the accumulated depreciation will be written off and loss on demolishing should be recorded
and cost associated with demolishing can be showed as expenses incurred (in case of demolition of
old building

A) It should be added to the cost of machine as strengthening the foundation will only make the
machines ready for its intended use

B) Everything except the material used should be added to the cost as the things done will only make
the machine ready for its intended use. Material used for trial can be shown as shrinkage expense by
crediting inventory

C) State sales tax should also be added to the cost of equipment because without paying tax the
machine is not ready for its intended use

D) It should be treated as gain on disposal of old one, eliminate the book value of asset given up and
also record the cost of asset acquired
E) The cost should be added to the asset value of leased computer and should be amortization
during the leasing period

F) Other marketing cost related to leased computers can be treated as expenses because for using
the asset, marketing is not required, also it cannot be capitalized

 In the case of research and development the costs are expensed even though we know that
the research and development of products would bring profit to the organization
 In that case if we apply this to the engineering costs, that also has to be expensed. But we
can see that the income didn’t increase as expected. From the customer point of view they
are not just buying the computer but also using the system along with it
 So the costs related to that can be added to the value of leased computers. But there comes
a problem for that. We are not sure about the revenue. We are not sure if the computer will
be leased for 4 years itself. At times it can be returned before the completion of 4 years. So
in that scenario it’s better to expense the costs as it is incurred

 Yes, the additional 50000$ used should also be capitalized along with the 1.5 million $, so that only
the equipment is ready for its intended use

 yes, the amount of depreciation should be adjusted as the expenditure increased from 1.5million
dollars to 15,50000 for the process of allocating to expense the cost of plant asset over it's useful
life. Then only we can match expenses with revenue in accordance with expense recognition
principle

 if the engineers can create the 65ppm standard equipment, the whole amount can be capitalized,
otherwise the additional expenses that was required for improvising the product will be transferred
to research and development cost as expense incurred

Ann Maria Renny

PGP13032

Section A