A company purchases a new production machine for $200,000. It also pays $8,000 for freight to deliver the machine to its factory, $12,000 for installation and testing to confirm the machine performs as intended, and $5,000 to train machine operators on how to use it. Under US GAAP, what is the capitalized cost of the machine?
- $225,000, because all four costs were necessarily incurred as part of bringing the machine into service
- $220,000, because freight, installation, and testing costs are necessary to bring the machine to its intended condition and location for use, while operator training is a cost of operating the asset rather than of acquiring it
- $200,000, because under US GAAP only the negotiated purchase price of an asset may ever be capitalized
- $208,000, because installation and testing costs are treated as repair and maintenance expense, while freight is capitalized as part of acquisition cost
Why B? And why not the others?
Correct answer: B. $220,000, because freight, installation, and testing costs are necessary to bring the machine to its intended condition and location for use, while operator training is a cost of operating the asset rather than of acquiring it
Under ASC 360-10-30, the capitalized cost of property, plant, and equipment includes all costs necessarily incurred to bring the asset to the condition and location necessary for its intended use. Freight and installation-and-testing costs meet that test directly: the machine cannot function in its intended location without being delivered, installed, and confirmed to work, so $200,000 plus $8,000 plus $12,000 equals a capitalized cost of $220,000. Operator training is different: the machine itself is already in its intended condition and location once installed and tested, and training addresses how employees operate the completed asset rather than what it takes to get the asset ready — so it is expensed as incurred, matching the general treatment of costs incurred after (or unrelated to) getting the asset into service. The option capitalizing all $225,000 wrongly folds training into acquisition cost. The option capitalizing only the $200,000 purchase price ignores that freight and installation-and-testing costs are squarely part of the cost-to-bring-to-intended-use test and are routinely capitalized. The option capitalizing $208,000 gets the treatment backwards, since installation and testing are exactly the kind of cost the standard requires to be capitalized, not expensed as repairs.
Source: FASB ASC 360-10-30 (initial measurement of property, plant, and equipment — costs necessary to bring an asset to the condition and location necessary for its intended use)