Joan holtz 7-2 and 8-3
Accounting Case Study Solution
Joan Holtz Case 7-2
The concerns raised by Joan Holtz in this problem are being addressed based on the Governing Principle of calculation of arriving cost of Fixed Asset.
1.) The cost of an item of Property, Plant, or Equipment, includes all expenditures that are necessary to make the Asset ready for its intended use. When a company constructs a building or item of equipment for its own use, the amount of capitalized cost includes all the costs incurred in construction.
2.) As in the case of Product costs, these costs include the materials and labor directly associated with the project, as well as a fair share of the company’s indirect costs incurred during the construction period.
3.) FASB requires that these capitalized costs also include Interest. The amount of Interest capitalized is the amount related to borrowings made to finance the project (construction loans) if these are identifiable.
4.) If not, the company must estimate the interest cost that must have been avoided if the asset in question had not been constructed. The total amount of interest capitalized cannot exceed the company’s total interest cost for the period. The interest capitalization ends when the asset is substantially complete and ready for its intended use.
5.) If the company contracts with an outside party to build the asset and makes deposits or progress payments to the contractor, then interest costs associated with these funds are included in the capitalized cost.
Answer to Question 1:
a.) Architects’ fees: As per the above explanation, the cost needs to be included in the cost of Building as it is an expenditure which is necessary to make the Building come into existence.
b.) Cost of Snow during Removal: It is added to the cost of Building as the expenditure is necessary for the asset’s intended use.
c.) Cash discounts earned: The income should be reduced from the Total cost of the Building as it is a one-time expenditure related only
Joan Holtz Case 7-2
The concerns raised by Joan Holtz in this problem are being addressed based on the Governing Principle of calculation of arriving cost of Fixed Asset.
1.) The cost of an item of Property, Plant, or Equipment, includes all expenditures that are necessary to make the Asset ready for its intended use. When a company constructs a building or item of equipment for its own use, the amount of capitalized cost includes all the costs incurred in construction.
2.) As in the case of Product costs, these costs include the materials and labor directly associated with the project, as well as a fair share of the company’s indirect costs incurred during the construction period.
3.) FASB requires that these capitalized costs also include Interest. The amount of Interest capitalized is the amount related to borrowings made to finance the project (construction loans) if these are identifiable.
4.) If not, the company must estimate the interest cost that must have been avoided if the asset in question had not been constructed. The total amount of interest capitalized cannot exceed the company’s total interest cost for the period. The interest capitalization ends when the asset is substantially complete and ready for its intended use.
5.) If the company contracts with an outside party to build the asset and makes deposits or progress payments to the contractor, then interest costs associated with these funds are included in the capitalized cost.
Answer to Question 1:
a.) Architects’ fees: As per the above explanation, the cost needs to be included in the cost of Building as it is an expenditure which is necessary to make the Building come into existence.
b.) Cost of Snow during Removal: It is added to the cost of Building as the expenditure is necessary for the asset’s intended use.
c.) Cash discounts earned: The income should be reduced from the Total cost of the Building as it is a one-time expenditure related only