capitalization

Examples of capitalization in the following topics:

• Working Capital Management Analysis

  • Along with fixed assets, such as property, plant, and equipment, working capital is considered a part of operating capital.
  • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
  • Decisions relating to working capital and short term financing are referred to as working capital management.
  • Profitability can be evaluated by looking at return on capital (ROC).
  • Identify working capital and discuss how a company would use it

• Cost of Improvements

  • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
  • Asset or capital improvements are undertaken to enhance or improve a business asset that is in use.
  • If the capital improvement is financed, the interest cost associated with the improvement should not be capitalized as an addition to the asset's historical cost.
  • Interest costs are not capitalized for assets that are not under construction.
  • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.

• Accounting Perspectives on Long-Lived Assets

  • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
  • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
  • Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.
  • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

• Analyzing Intangible Assets

  • Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses.
  • Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.
  • For example, an amount paid to obtain a trademark must be capitalized.
  • Certain amounts paid to facilitate these transactions are also capitalized.
  • The regulations contain many provisions intended to make it easier to determine when capitalization is required.

• Reporting R&D Cost

  • Expense R&D, unless items have alternative future uses, then allocate as consumed, or capitalize and depreciate as used.
  • A cost which cannot be deducted in the year in which it is paid or incurred must be capitalized.
  • The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized.
  • The capital expenditure costs are then amortized or depreciated over the life of the asset.
  • The costs associated with R&D activities and the accounting treatment accorded them are as follows: expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise), then carry as inventory and allocate as consumed, or capitalize and depreciate as used.

• Overview of Lease Accounting

  • There are two types of leases capital leases and operating leases.
  • Capital equipment is financed either with debt or equity.
  • A capital lease is a form of debt-equity financing in which the lease acts like loan.
  • To that end, a capital lease must be recorded as liability on the company's balance sheet, it is important to note that the IRS treats capital leases as a liability.
  • Under a capital lease, the lessee does not record rent as an expense.

• Valuing Repairs, Maintenance, and Additions

  • Improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
  • Since these expenditures benefit an increased number of future periods, accountants capitalize rather than expense them.
  • If an expenditure that should be expensed is capitalized, the effects are more significant.
  • The company capitalized the USD 6,000 that should have been charged to repairs expense in 2010.
  • Explain what a capital expenditure is and how a company would account for it.

• Cost of Interest During Construction

  • The capitalization of interest costs involves adding the amount of interest expense incurred and/or paid during the asset's construction phase to the asset's cost recorded on the balance sheet.
  • Interest cost capitalization does not apply to retail inventory constructed or held for sale purposes.
  • If any delays occur during the construction phase, the interest costs incurred during the delay are not capitalized.
  • When the asset's construction is complete and the asset is ready for use, any additional interest expense incurred is no longer capitalized as part of the asset's cost.

• Introduction to IFRS

  • Current Cost Accounting, under Physical Capital Maintenance at all levels of inflation and deflation under the Historical Cost paradigm as well as the Capital Maintenance in Units of Constant Purchasing Power paradigm
  • Financial capital maintenance in units of constant purchasing power, i.e., Constant Item Purchasing Power Accounting – CIPPA – in terms of a Daily Consumer Price Index or daily rate at all levels of inflation and deflation under the Capital Maintenance in Units of Constant Purchasing Power paradigm and Constant Purchasing Power Accounting – CPPA – during hyperinflation under the Historical Cost paradigm.
  • Going concern: for the foreseeable future an entity will continue under the Historical Cost paradigm as well as under the Capital Maintenance in Units of Constant Purchasing Power paradigm
  • Stable measuring unit assumption: financial capital maintenance in nominal monetary units or traditional Historical cost accounting only under the traditional Historical Cost paradigm.
  • Units of constant purchasing power: capital maintenance in units of constant purchasing power at all levels of inflation and deflation in terms of a Daily Consumer Price Index or daily rate only under the Capital Maintenance in Units of Constant Purchasing Power paradigm.

• Accounting for Sale of Stock

  • Credit additonal paid in capital (to account for the difference between par value and sell value)
  • The sale of preferred stock is similarly treated, but a separate accounts should be established to record preferred stock and any additional paid in capital for preferred stock sold at above par value.
  • Credit additional paid in capital (the difference between sale price and purchase price)