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Which of the following statements about capitalizing costs is correct? A. Capitalizing costs refers to the process of converting assets to expenses. B. Only the purchase price of the asset is capitalized. C. Capitalizing a cost means to record it as an asset. D. Capitalizing costs results in an immediate decrease in net income.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 11, Problem 4MC
Textbook Problem
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Which of the following statements about capitalizing costs is correct?

A. Capitalizing costs refers to the process of converting assets to expenses.

B. Only the purchase price of the asset is capitalized.

C. Capitalizing a cost means to record it as an asset.

D. Capitalizing costs results in an immediate decrease in net income.

To determine

Introduction:

Capitalization is the process by which a long-term asset is recorded on the balance sheet and its allocated costs are expensed on the income statement over the asset’s economic life.

To choose:

The correct option.

Explanation of Solution

Explanation for correct answer:

Capitalizing a cost means to record it as an asset is the correct statement because when a business purchases a long-term asset (used for more than one year), it classifies the asset based on whether the asset is used in the business’s operations. If a long-term asset is used in the business operations, it will belong in property, plant, and equipment or intangible assets. In this situation the asset is typically capitalized.

Long-term assets that are not used in daily operations and are typically classified as an investment. For example, if a business owns a land on which it operates a store, warehouse, factory, or offices, the cost of that land would be included in property, plant, and equipment. However, if a business owns a vacant piece of land on which the business conducts no operations, the land would be considered as an investment.

Explanation for incorrect answers:

  1. Capitalizing costs refers to the process of converting assets to expenses - This statement is not correct because capitalization is the process by which a long-term asset is recorded on the balance sheet and its allocated costs are expensed on the income statement over the asset’s economic life...

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Chapter 11 Solutions

Principles of Accounting Volume 1
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