Multiple Choice
Which of the following is included in the calculation of Cost of Goods Sold (COGS) under a periodic inventory system?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Vicious Cycle built a new building. Which of the following costs should be expensed rather than capitalized?
A
Cost of building permits
B
Routine maintenance costs incurred after the building is completed
C
Legal fees to obtain title to the land
D
Architect fees paid during the construction of the building
Verified step by step guidance1
Understand the difference between capitalizing and expensing costs. Capitalizing means recording a cost as an asset on the balance sheet, which will be depreciated over time. Expensing means recording the cost as an expense on the income statement in the period it is incurred.
Identify costs that are directly related to acquiring or constructing the building. These costs, such as building permits, legal fees to obtain title to the land, and architect fees during construction, are typically capitalized because they contribute to the creation of the asset.
Recognize costs that are incurred after the building is completed and are not directly related to its acquisition or construction. Routine maintenance costs fall into this category because they are recurring expenses necessary to maintain the building's functionality, not to enhance its value or extend its useful life.
Apply the principle that costs incurred to maintain an asset after it is operational are expensed, while costs that enhance the asset or prepare it for use are capitalized.
Conclude that routine maintenance costs incurred after the building is completed should be expensed, while the other costs listed (building permits, legal fees, and architect fees) should be capitalized as part of the building's cost.
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