Question

Generally, freight costs incurred when a long-lived asset is purchased should be:

1) Capitalized as part of the cost of the asset
2) Expensed as incurred
3) Recorded as a liability
4) Not recorded in the financial statements\

Answer 1

The correct answer is 1) Capitalized as part of the cost of the asset.

Step-by-step explanation:

When a long-lived asset is purchased, the general rule is to capitalize the freight costs as part of the cost of the asset. This means that the freight costs are added to the initial cost of the asset and are recorded as an asset on the balance sheet. By capitalizing the freight costs, the company is recognizing that these costs are necessary to acquire and put the asset into its intended use.

For example, if a company purchases a piece of machinery for $10,000 and incurs $500 in freight costs to have it delivered to its location, the total cost of the asset will be recorded as $10,500. Both the machinery and the freight costs will be included in the value of the asset.

This treatment follows the principle of matching costs with revenues, as the freight costs are directly related to acquiring the asset and enabling its use to generate future economic benefits.