Capitalizing vs Expensing Costs: Unlocking the Difference for Businesses

Abstract

Question #1: What is the difference between capitalizing and expensing costs? When a cost is associated with an expenditure that is consumed once, then it is charged to the expense. The expense is recorded in the income statement therefore the expensing is a process applied when the expenditure is consumed at once. If the expenditure is to be consumed over a long period, then it is capitalized and treated as an asset on the company’s balance sheet. Capitalizing is therefore a process applied when consumption takes a long period of time. Question #2: What is goodwill and how is it measured? Goodwill is an intangible asset that accounts for the excess purchase of a company. It cannot be qualified and it includes intellectual property, brand recognition, and reputation. Goodwill is measured using the following formula: Goodwill=Consideration transferred+Amount of non-controlling interest+Fair value of previous equity interests-Net identifiable assets​ Question #3: Explain how PPE and intangible assets acquired through donations are valued. These assets must be valued at fair market value and donations are recorded as revenue. Question #4: In your own words, give a real-life example of a transaction “Lacking Commercial Substance” and “Having Commercial Substance”. Lacking a commercial substance means there are no monetary gains due to the exchange transaction. An example is selling assets to the owner of a sole proprietorship who immediately leases back to the company. An example is selling computers to an IT business owner who puts them into his business as a lease. Having a commercial substance means there are monetary gains in the exchange transaction. An example is a shoe company signing a contract with a leather company at preferential rates. The cost and sale prices of shoes decreased hence increasing the sales of the company. Question #5: Other...