When to stop assigning costs to a fixed asset
/A recurring accounting question is when to stop compiling the costs of a new asset and including them in its capitalized cost. The basic rule is to only recognize costs in the carrying amount of a fixed asset until the item is in the location and condition for it to be capable of operating in the manner intended by management. This means that no further costs should be added to a fixed asset once the asset achieves this status, even if it is not yet actually used in the manner intended by management. After that point, costs are not assigned to a fixed asset unless the related activity prolongs the life of the asset or increases its utility.
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Example of When to Stop Assigning Costs to a Fixed Asset
Cardinal Corporation is building a new factory to produce automotive parts. The project includes acquiring land, constructing the building, installing production equipment, and setting up utilities. During the construction phase, the company incurs the following costs, which are capitalized as part of the factory's fixed asset value:
Land purchase costs (excluding land improvements)
Construction materials and labor
Architectural and engineering fees
Permit and legal fees
Transportation and installation of machinery
Testing and calibration of machines
Cardinal continues adding costs to the factory’s asset value until the facility is ready for its intended use. This means that costs are no longer capitalized when the building is structurally complete, all machinery is installed and has passed initial testing, and the facility is ready to begin normal production. After this point any further costs, such as employee training, marketing, or normal maintenance, are expensed rather than capitalized.