Question

For each of the following transactions, state whether the cost would be capitalized (C) or recorded as an expense (E).

Purchased raw materials for production.
a) Capitalized (C)
b) Expense (E)
c) Both
d) Neither

Answer 1

The cost would be capitalized (C) or recorded as an expense (E).

a) Capitalized (C)

Step-by-step explanation:

When raw materials are purchased for production, the cost is capitalized. Capitalizing means recognizing the cost as an asset on the balance sheet rather than immediately expensing it on the income statement. Raw materials represent future economic benefits as they are used in the production process. Therefore, the cost is treated as an asset until the goods produced are sold.

a) Capitalized (C): In accounting, the general rule is to capitalize the cost of raw materials that will be used in the production process. Capitalizing involves recording the cost as an asset on the balance sheet. Raw materials are considered an integral part of the production process, and their cost contributes to the creation of value in the form of finished goods. The capitalized cost is later expensed when the finished goods are sold.

In conclusion, the correct option is a) Capitalized (C).