Question

Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized?

A) $1,5000 paid for a party to celebrate the grand opening
B) $4,200 paid in sales tax on the lumber to build the lodge
C) $70,000 cost of lumber to build the lodge
D) $7,000 in architect fees

Answer 1

The costs that should be capitalized when building a new lodge for Shenandoah Skies ski resort are the cost of lumber to build the lodge and the architect fees. The cost of a party to celebrate the grand opening and the sales tax on the lumber should not be capitalized. option c

Step-by-step explanation:

The costs that should be capitalized are the direct costs that are incurred to bring an asset to its intended use. In this case, the cost of lumber to build the lodge and the architect fees should be capitalized because they directly contribute to the construction of the lodge.

The $70,000 cost of lumber is a direct cost because it is necessary to build the lodge. Similarly, the $7,000 architect fees are also a direct cost because they are incurred to design the lodge.

The $1,500 paid for a party to celebrate the grand opening should not be capitalized as it is an indirect cost and not directly related to the construction of the lodge. The $4,200 paid in sales tax on the lumber should also not be capitalized as it is an expense related to the purchase of the lumber, rather than its construction.