Question

Correct answer. Your answer is correct.

Which of the following costs are capitalized for self-constructed assets?


Entry field with correct answer
Materials and labor only
Labor and overhead only
Materials, labor, and overhead
Materials and overhead only

Answer 1

Costs that are capitalized for self-constructed assets include materials, labor, and overhead. These are capitalized to create a capital asset on the balance sheet and are spread over the asset's useful life, adhering to the matching principle in accounting.

Step-by-step explanation:

The question pertains to the capitalization of costs for self-constructed assets. When a company constructs an asset for its own use, it capitalizes costs that are directly attributable to the construction of the asset. These costs typically include the materials, labor, and overhead that are necessary to bring the asset to a condition and location suitable for use in the operation. The capitalized cost thus creates a capital asset on the balance sheet.

Capitalization of costs ensures that the expenses associated with creating a durable asset are spread over the useful life of the asset rather than being fully recognized in the period when they are incurred. This aligns with the matching principle in accounting where costs are recognized with the income they help generate.