The criteria for capitalization of fixed assets generally refers to capitalize incurred cost to achieve greater benefit in the future Custom Essay

The criteria for capitalization of fixed assets generally refers to capitalize incurred cost to achieve greater benefit in the future. The criteria are (1) the useful life of the asset must be increased, or (2) the quantity of units produced from the asset must be increased, or (3) the quality of the units produced must be enhanced. In General, four major types of expenses are included in the cost of a fixed asset, they are (1) Additions – increase or extension of existing assets (2) Improvements and replacements – substitution of an improved asset for an existing one (3) Rearrangement and reinstallation – movement of assets from one location to another to benefit future periods (4) Repairs – expenditures that maintain assets in condition for operation. Interested should be included in the cost of a fixed asset, GAAP requires the capitalizing actual interest method, which means that the historical cost of acquiring an asset includes all costs incurred to bring the asset to the condition and location for its intended use, the company can defer interest costs until the asset is ready to use and the company can earn revenue. When a company includes interest in the cost of a fix asset, it should consider three items including qualifying assets, capitalization period, and amount to capitalize.