The cost of furniture and fixtures includes all costs to ready the asset for its intended use.
True
False
The correct answer and explanation is:
Answer: True
Explanation:
The cost of furniture and fixtures indeed includes all costs necessary to ready the asset for its intended use. This is a fundamental principle in accounting related to the recognition of fixed assets.
When a business purchases furniture and fixtures, the initial recorded cost is not just the purchase price. Instead, it comprises the total cost incurred to acquire and prepare the asset for use. These costs can include:
- Purchase price: The basic cost paid to buy the furniture or fixtures.
- Import duties and non-refundable taxes: Any taxes or duties paid that are not recoverable.
- Delivery and handling fees: Costs to transport the asset to the business location.
- Installation and assembly costs: Expenses related to setting up the furniture or fixtures so they can be used.
- Testing and preparation costs: If applicable, any costs for testing the asset to ensure it functions properly.
- Professional fees: Sometimes, architect or consultant fees related to installation or fitting.
These costs are capitalized, meaning they are added to the asset’s recorded value on the balance sheet rather than expensed immediately. This capitalization is because these costs provide future economic benefits over the asset’s useful life.
Why is this important?
Capitalizing all costs to ready the asset ensures the balance sheet reflects the true cost of acquiring the asset. This proper valuation affects depreciation calculations and, consequently, the business’s profit reporting over time.
For example, if a company buys office furniture for $5,000 but spends $500 on delivery and $300 on installation, the total cost of the asset recorded should be $5,800.
Summary:
The statement is True because the cost of furniture and fixtures includes all costs necessary to get the asset ready for use, not just the purchase price. Proper capitalization ensures accurate financial reporting and reflects the asset’s full value on the company’s financial statements.