PPE - Capitalized Costs

Capitalized Costs

Capitalized costs are those that are included in the asset rather than expensed and fall into two
categories:

1. Costs to get the asset ready for use, and

2. Costs to extend the assets' useful life or improve productivity.

Practice Question

Description Amount
Purchase price $10,00,000
Real estate taxes in arrears 15,000
Debt issuance costs 2,000
Attorney fee - title search on land 5,000

The company should record its acquisition of the land in its financial statements at what value?

Practice Question

Assume a purchase of a tract of land for a future factory site for $200,000. The old building on the property
was razed and salvaged materials resulting from demolition were sold. Costs and proceeds were as
follows

Description Amount
Demolition of old building 25,000
Legal fees for purchase contract 5,000
Title guarantee insurance 6,000
Proceeds from sale of salvaged materials 4,000

How much should be recorded for the purchase of land?

Other Capitalized Costs

Other costs that can be capitalized if the cost:

1. extends an asset's useful life or

2. improves the quality/quantity of an asset's services without extending its useful life.

These expenditures are capitalized and included in the book value of the asset.

Examples: additions, improvements, replacements, and rearrangements

PPE 2|Page