Question
Question 3
A company spent $5000 to install a new theft-detection system in its headquarters. Management wasn’t sure whether this cost should be capitalized to the Buildings account or expensed immediately. The CFO flipped a coin, it came up heads, so the company capitalized the costs.
Which of the following would be increased because the CFO is capitalizing these costs instead of expensing them immediately? (check all that apply)
(Hint: Do the journal entries for both capitalizing and expensing and use the differences to answer the question)
Buildings
Cash from Operations
Total Stockholders’ Equity
Maintenance Expense
Cash from Investing Activities
1 point
4.
Question 4
A com
A company spent $5000 to install a new theft-detection system in its headquarters. Management wasn’t sure whether this cost should be capitalized to the Buildings account or expensed immediately. The CFO flipped a coin, it came up heads, so the company capitalized the costs.
Which of the following would be increased because the CFO is capitalizing these costs instead of expensing them immediately? (check all that apply)
(Hint: Do the journal entries for both capitalizing and expensing and use the differences to answer the question)
Buildings
Cash from Operations
Total Stockholders’ Equity
Maintenance Expense
Cash from Investing Activities
1 point
4.
Question 4
A com
Answers
GPT-4o mini
To analyze the impact of capitalizing versus expensing the costs of the theft-detection system on the financials, let’s break down the journal entries for both scenarios.
### If the cost is **capitalized**:
- **Journal Entry**:
- Debit Buildings (Asset) $5,000
- Credit Cash (Asset) $5,000
### If the cost is **expensed immediately**:
- **Journal Entry**:
- Debit Maintenance Expense (Expense) $5,000
- Credit Cash (Asset) $5,000
### Impacts of Capitalizing Costs:
1. **Buildings**: Capitalization will increase the Buildings account by $5,000.
2. **Cash from Operations**: If the cost is expensed, it reduces operating cash flows since expenses are deducted from operating income, thereby affecting cash from operations negatively. However, if capitalized, it does not affect cash from operations since it is recorded as an asset.
3. **Total Stockholders’ Equity**: Capitalizing the cost affects net income in the future. Instead of a $5,000 expense hit to net income in the current period (which would reduce stockholders' equity), capitalizing means that the Building asset increases, and the expense will be amortized over time, resulting in higher net income (and thus higher stockholders’ equity) in the current period.
4. **Maintenance Expense**: Will not be affected positively (or will actually decrease) since capitalizing costs means they are not immediately recognized as an expense.
5. **Cash from Investing Activities**: When capitalizing, cash outflow for the installation will be reflected under investing activities since it increases a capital asset. There would be no impact from this transaction on cash flows from investing activities simply due to the timing of the recognition, but the categorization is key.
### Conclusion:
Based on the analysis:
- **Increased Accounts**:
- **Buildings**
- **Total Stockholders’ Equity**
- **Not Increased**:
- **Cash from Operations** (is actually decreased due to no immediate expense)
- **Maintenance Expense** (not applicable here)
- **Cash from Investing Activities** (cash outflow is the same, but it’s different categories moving forward)
So the correct answers are:
- **Buildings**
- **Total Stockholders’ Equity**
### If the cost is **capitalized**:
- **Journal Entry**:
- Debit Buildings (Asset) $5,000
- Credit Cash (Asset) $5,000
### If the cost is **expensed immediately**:
- **Journal Entry**:
- Debit Maintenance Expense (Expense) $5,000
- Credit Cash (Asset) $5,000
### Impacts of Capitalizing Costs:
1. **Buildings**: Capitalization will increase the Buildings account by $5,000.
2. **Cash from Operations**: If the cost is expensed, it reduces operating cash flows since expenses are deducted from operating income, thereby affecting cash from operations negatively. However, if capitalized, it does not affect cash from operations since it is recorded as an asset.
3. **Total Stockholders’ Equity**: Capitalizing the cost affects net income in the future. Instead of a $5,000 expense hit to net income in the current period (which would reduce stockholders' equity), capitalizing means that the Building asset increases, and the expense will be amortized over time, resulting in higher net income (and thus higher stockholders’ equity) in the current period.
4. **Maintenance Expense**: Will not be affected positively (or will actually decrease) since capitalizing costs means they are not immediately recognized as an expense.
5. **Cash from Investing Activities**: When capitalizing, cash outflow for the installation will be reflected under investing activities since it increases a capital asset. There would be no impact from this transaction on cash flows from investing activities simply due to the timing of the recognition, but the categorization is key.
### Conclusion:
Based on the analysis:
- **Increased Accounts**:
- **Buildings**
- **Total Stockholders’ Equity**
- **Not Increased**:
- **Cash from Operations** (is actually decreased due to no immediate expense)
- **Maintenance Expense** (not applicable here)
- **Cash from Investing Activities** (cash outflow is the same, but it’s different categories moving forward)
So the correct answers are:
- **Buildings**
- **Total Stockholders’ Equity**