Which of the following costs associated with a delivery van should NOT be capitalized?

• A. Cost of installing a new engine
• B. Purchase price of the van
• C. Sales tax paid at acquisition
• D. Routine maintenance and oil changes

Answer: (D)

Verified step by step guidance

1. Understand the concept of capitalization: Capitalization refers to recording a cost as an asset on the balance sheet rather than an expense on the income statement. Costs that provide future economic benefits and extend the useful life of an asset are typically capitalized.
2. Review the costs listed in the problem: Analyze each cost to determine whether it provides future economic benefits or is a routine expense. For example, the cost of installing a new engine extends the useful life of the van, so it should be capitalized.
3. Evaluate the purchase price and sales tax: The purchase price of the van and the sales tax paid at acquisition are directly related to acquiring the asset and should be capitalized as part of the van's initial cost.
4. Consider routine maintenance and oil changes: Routine maintenance and oil changes are recurring expenses that do not extend the useful life of the van or provide future economic benefits. These costs should be expensed in the period incurred rather than capitalized.
5. Conclude that routine maintenance and oil changes should NOT be capitalized: These costs are considered operating expenses and are recorded on the income statement rather than the balance sheet.