Question

A pen costs $10 and has a life of 10 years. How do you put it on a balance sheet?

a) Expense Immediately
b) Capitalize and Amortize
c) Record as a Liability
d) Ignore it on the Balance Sheet

Answer 1

A pen should be capitalized and amortized on the balance sheet.

Step-by-step explanation:

The correct answer is b) Capitalize and Amortize.

When a pen is purchased, it is considered a long-term asset because it will provide benefits over multiple years. Therefore, it should be capitalized and recorded on the balance sheet as an asset. The cost of the pen, $10, is recorded as an increase in the asset account called 'Pens' or 'Office Supplies'. The pen's cost is then amortized, or expensed gradually over its useful life of 10 years. This expense is recognized on the income statement.

An example journal entry to capitalize and amortize the pen would be:

1. Debit: Pens (or Office Supplies) - $10
2. Credit: Cash (or Accounts Payable) - $10

Then, each year, an amortization expense is recognized:

1. Debit: Amortization Expense - $1
2. Credit: Accumulated Amortization - $1