Which costs to assign to a fixed asset
/The costs to assign to a fixed asset are its purchase cost and any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management. More specifically, assign the following costs to a fixed asset:
Purchase price of the item and related taxes
Construction cost of the item, which can include labor and employee benefits
Import duties
Inbound freight and handling
Interest costs incurred during the period required to bring an asset to the condition and location necessary for its intended use
Site preparation
Installation and assembly
Asset startup testing
Professional fees
Also, assign to a fixed asset the cost of major periodic replacements. For example, an aircraft requires new engines and a building requires a new roof after a certain usage interval or time period. Upon replacement, the new items are recorded as a fixed asset, and the carrying amounts of any replaced items are derecognized.
Related AccountingTools Courses
Costs Not to Assign to a Fixed Asset
The following costs should not be assigned to a fixed asset:
Administration and general overhead costs
Costs incurred after an asset is ready for use, but has not yet been used or is not yet operating at full capacity
Costs incurred that are not necessary to bring the asset to the location and condition necessary for it to operate
Initial operating losses
New customer acquisition costs
New facility opening costs
New product or service introduction costs
Relocation or reorganization costs
Do not recognize as a fixed asset the ongoing costs of servicing a fixed asset, which typically includes maintenance labor, consumables, and minor maintenance parts; these costs should instead be charged to expense as incurred.
Example of Fixed Asset Cost Assignment
Nascent Corporation constructs a solar observatory. The project costs $10 million to construct. Also, Nascent takes out a loan for the entire $10 million amount of the project, and pays $250,000 in interest costs during the six-month construction period. Further, the company incurs $500,000 in architectural fees and permit costs before work begins. All of these costs can be capitalized into the cost of the building asset, so Nascent records $1.75 million as the cost of the building asset.