Multiple Choice
Under both perpetual and periodic inventory systems, how does an increase in inventory holding cost per unit affect the per-unit profit, assuming all other factors remain constant?
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4. Merchandising Operations
Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory
Multiple Choice
Which of the following costs is NOT recorded as part of the cost of a new building?
A
Construction labor and materials
B
Building permit fees
C
Architectural fees for the building design
D
Cost of land on which the building is constructed
Verified step by step guidance1
Understand the concept of capitalizing costs: In financial accounting, costs directly related to acquiring or constructing an asset, such as a building, are capitalized. This means they are recorded as part of the asset's cost on the balance sheet rather than being expensed immediately.
Identify costs directly related to the building: Construction labor and materials, building permit fees, and architectural fees are all directly related to the construction and design of the building. These costs are necessary to bring the building to its intended use and are therefore capitalized.
Differentiate the cost of land: The cost of land is treated separately from the cost of the building. Land is a distinct asset and is recorded as its own line item on the balance sheet. It is not included in the cost of the building because land is not depreciated, whereas buildings are subject to depreciation over time.
Review accounting treatment: Costs associated with the land, such as purchase price, legal fees, and site preparation, are recorded as part of the land asset. These costs are not included in the building asset because they pertain to the land itself.
Conclude the distinction: The cost of land on which the building is constructed is not recorded as part of the building's cost because it is classified as a separate asset. Only costs directly tied to the construction and preparation of the building are included in the building's cost.
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