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Financial Accounting: In an Economic Context by Jamie Pratt

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ACQUISITION: WHAT COSTS TO CAPITALIZE?

The acquisition cost of a long-lived asset is determined by either (1) the fair market value (FMV) of the acquired asset or (2) the FMV of what was given up to acquire the asset, whichever is more readily determinable. In almost all cases, the FMV of what was given up is used because cash, which by definition is at FMV, is normally given up in such exchanges. Furthermore, the capitalized cost (i.e., the FMV of what was given up) should include all costs required to bring the asset into serviceable or usable condition and location.1 Such costs include not only the actual purchase cost of the asset but also costs like freight, installation, taxes, and title fees. For example, suppose that the purchase cost of a piece of equipment is $25,000, and it costs $2,000 to have it delivered, $1,500 to have it installed, and taxes and title fees total $500 and $300, respectively. The total capitalized cost of the equipment would then be $29,300 ($25,000 + $2,000 + $1,500 + $500 + $300), and the following journal entry would be entered to record the acquisition, assuming that cash is paid for the equipment.

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image Zimmer, a major manufacturer of orthopedic equipment, increased its investment in property, plant, and equipment by almost $250 million during 2008. ...

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