What's in the Cost of My Capital Assets?

The simple answer is that the cost of a capital asset is the outlay of cash (or accounts payable) you must make for the asset. For example, if you go to the office supply store and buy a new desk for $100 (ignore taxes for now), the entry in the general journal would be­

            DR     Furniture & fixtures             $100

            CR Cash                                                $100

 

Satellite costs

There may also be other costs involved in buying an asset and getting it ready for use. For example, when you buy a piece of specialized machinery, there might be shipping costs as well as the cost of an electrician to install it and get it working. These "satellite" costs would also be included in the cost of the asset. They are considered fundamental to the 'purchase of the asset and not a period cost.

Satellite costs also commonly occur with the purchase of land and buildings. There are many extra costs that could be part of the purchase, such as legal fees, realtor fees, appraisal costs, zoning charges, and building permits. These are all considered to be a part of the sale, and you would include them in the cost of the asset. Setting up the purchase entry for a land and building purchase might look like this:

DR Land                             $27,500

DR Building (cost)                93,450

DR Building (satellites)           4,923

CR Cash (down payment)                     $30,000

CR Mortgage payable                             95,873

 

Trade-ins

Determining the cost of a capital asset gets a little more complicated when trade-ins are taken into account. A typical example is the purchase of a vehicle. You might trade in your old vehicle and pay (or finance) the difference. Accounting rules state that the value of assets purchased is equal to the value of the assets given up. For example, if your old truck is on the books at $4,000, and you trade it and a check for $10,000 for a new vehicle, the new vehicle gets set up on the books at $14,000, regardless of the list price of the new truck. Because there is already $4,000 in the vehicle account (related to the old truck), you would make the following entry to account for the cash component:

            DR Vehicle                $10,000

            CR Cash                                        $10,000