Case 7-2 Joan Holtz Essay Example

good will. Regarding the installation of an additional steel beam, there are three options for cost allocation.

The term "it" refers to two different things: building and machine. It can be capitalized in reference to the building, as it contributes to its strengthening and improvement, or in reference to the machine, as it is part of the installation costs.

According to the text, there are two options for dealing with the cost of a machine. One option is to expense the cost over operating expenses to take advantage of tax reductions. Alternatively, the cost can be capitalized, resulting in significant depreciation and a lower net income. The text also states that all costs associated with installing the machine can be capitalized.

Point a) suggests that considering maximizing expenses for tax purposes may be beneficial. One way to do this when purchasing machinery is to capitalize the cost of sales tax along with purchase price, transportation costs, and installation costs. These objective costs prepare the machine for future cash flow in line with points a) and b). However, there is also an option to expense these costs for tax purposes. Point d) recommends adding the net book value of an old machine – if it resembles the new one – to the cost of the new machine alongside cash.

In order to evaluate the worth of an outdated machine that differs from a newer one, determining its market value is crucial. This entails computing the variance between its market value and net book value, which yields either a gain or loss upon disposal. Moreover, expenses linked with Research and Development are frequently expensed owing to uncertainty regarding future

revenue. As for leasing customers, they cover the cost of "applications engineering" in their lease agreement but only utilize and pay for the computers after receiving this service.

It is certain that "applications engineering" will generate future revenue as customers are paying the leases. Consequently, this service can be capitalized as an asset value of leased computers and amortized over the lease period. The equipment was designed to produce products of 65 ppm quality, and the principle of capitalizing costs for property, plant or equipment includes all necessary expenditures to make the asset ready for its intended use.

The equipment needs an additional $50,000 for debugging, fine-tuning, and testing to meet the 65 ppm quality standard for its intended use. Failing to achieve this standard would result in customers buying subpar products. As units are being sold, it's important to ensure that related costs match revenue. One of the costs to consider is depreciation, but determining the total cost of the fixed asset is impossible until all the costs needed to achieve the required standard are accounted for. Nevertheless, there are several ways to circumvent this issue.

Two temporary options exist for determining the cost of equipment. The first involves calculating depreciation based on cost-to-date, which represents the sum of capitalized expenses for the equipment up to the point when revenue generation begins. The second option is to capitalize $50,000 of the equipment cost, resulting in a total cost of $550,000 and beginning depreciation once revenue is earned.

Adjustments to current and previous period depreciation are necessary for both methods when quality is achieved and actual cost is determined. Both methods are acceptable in their

ability to estimate future equipment costs accurately, making the choice between them arbitrary. However, a concern arises if the 65 ppm quality standard becomes unachievable.

In the event of the occurrence mentioned, the guidelines for research and development capitalization and expense criterion must be adhered to. This will result in equipment costs of $500,000, and any spending made in an effort to achieve 65ppm will be considered a process improvement that generates no future cash flow and will be expensed accordingly. Consequently, the depreciation of prior and current periods will require adjustment. Nonetheless, the financial statements should remain unaffected by skeptics who question the possibility of achieving quality standards as these are merely speculative opinions.