Question

Suppose Smart Touch Learning purchased a building. The purchase price would be included in the cost of the building, but any renovations to get the building ready for its intended use would be considered expenses on the income statement.

A. True
B. False

Answer 1

The claim that renovations should be considered as expenses on the income statement is false. Purchase price and renovation costs that enhance asset value are capitalized on the balance sheet and expensed over time as depreciation. Only non-value-adding repairs are expensed immediately in the income statement.

Step-by-step explanation:

The statement that renovations to get a building ready for its intended use would be considered expenses on the income statement is false. When Smart Touch Learning purchases a building, both the purchase price and the costs of renovations to prepare the building for its intended use are typically capitalized and included in the building's asset value on the balance sheet. Over time, these costs are expensed through depreciation, which reflects the usage and wear and tear of the asset.

However, if any renovations or repairs are considered as maintenance or are not significant improvements, such costs may be considered expenses and included in the income statement immediately. The distinction is based on whether the expenditures add value to the asset and prolong its useful life (capital expenditures) or whether they simply maintain the current value (expense).