Which of the following costs is NOT recorded as part of the cost of machinery and equipment?

• A. Installation costs
• B. Costs to test the equipment before use
• C. Annual maintenance expenses
• D. Freight charges to deliver the equipment

Answer: (C)

Verified step by step guidance

1. Understand the concept of capitalizing costs: Costs that are directly related to acquiring and preparing an asset for use are capitalized, meaning they are recorded as part of the asset's cost on the balance sheet. These costs include purchase price, delivery charges, installation costs, and testing costs.
2. Identify the costs listed in the problem: Installation costs, costs to test the equipment before use, annual maintenance expenses, and freight charges to deliver the equipment.
3. Determine which costs are directly related to acquiring and preparing the machinery and equipment for use: Installation costs, testing costs, and freight charges are all necessary to get the equipment ready for its intended use and are therefore capitalized.
4. Understand why annual maintenance expenses are not capitalized: Maintenance expenses are recurring costs incurred to keep the equipment in working condition after it is already in use. These are considered operating expenses and are recorded on the income statement, not as part of the asset's cost.
5. Conclude that annual maintenance expenses are the correct answer because they are not part of the costs capitalized for machinery and equipment.