Final answer:
Insurance costs once the asset is operational are not capitalized as part of the purchased asset's cost but are recorded as operational expenses. These costs are expensed over the period of the insurance coverage and do not enhance the value of the asset like other capital expenditures.
Step-by-step explanation:
When considering the capitalization of costs associated with a purchased asset, certain expenditures are included in the asset's historical cost and thus are capitalized, whereas others are considered operational expenses and are not capitalized. The assets' costs that can be capitalized include the price of the asset, non-refundable taxes paid on purchase, and installation costs. These are necessary expenditures for bringing the asset to its intended use.
However, insurance costs once the asset is operational would not be capitalized as part of the assets' cost. Instead, these would be recorded as operational expenses during the period in which they are incurred. This is because the benefit from the insurance is recognized over the course of the insurance policy period, not just when the asset is purchased.
Understanding the difference between capital expenditures and operational expenses is crucial in accounting and financial reporting. Capital expenditures improve or extend the life of an asset and are amortized or depreciated over the useful life of the asset. In contrast, operational expenses are short-term costs that are expensed in the period they are incurred.