Question

Under the cost principle, a company capitalizes:

a. all ordinary repair expenditures incurred in the use of an asset.
b. any interest incurred in borrowing money to help pay for asset acquisitions.
c. all reasonable and necessary costs of acquiring an asset and preparing it for use.
d. the total market value of individual assets acquired in a 'basket purchase.'

Answer 1

Under the cost principle, a company capitalizes all reasonable and necessary costs of acquiring an asset and preparing it for use. This encompasses physical goods and intellectual property necessary for producing goods and services.

Step-by-step explanation:

Under the cost principle, a company capitalizes:

1. all ordinary repair expenditures incurred in the use of an asset.
2. any interest incurred in borrowing money to help pay for asset acquisitions.
3. all reasonable and necessary costs of acquiring an asset and preparing it for use.
4. the total market value of individual assets acquired in a 'basket purchase.'

The correct answer is that a company capitalizes all reasonable and necessary costs of acquiring an asset and preparing it for use. This includes expenses such as the purchase price, delivery fees, installation charges, and any other expenditures required to bring the asset to a condition and location suitable for its intended use. Capital may include both physical goods and intellectual property, as these resources can be used to produce goods and services, meeting the two criteria for being considered capital.