Question

A firm recently replaced an existing piece of machinery with a different model that produces a higher-quality finished product with fewer manufacturing errors. The firm decides to capitalize the cost of the new machine while keeping the carrying amount of the old machine on its books. This suggests that the firm__________.

Answer 1

Answer:

capitalize the new cost as an asset to be amortized over future periods expected to benefit

Explanation:

A capitalized cost is a cost which is added to the cost basis of a fixed asset on a company's balance sheet. This Capitalized costs are sustained from the purchase or construction of fixed assets.  Example of such costs are costs of materials, sales taxes, labor, transportation, and interest incurred to finance the construction of the asset.

This is usually done for items that would be used over a long period of time, therefore the item is capitalized and amortized or depreciated over its future periods.

Answer 2

Answer:

does not know the carrying amount of the old machine but assumes it is near $0.

Explanation:

Since the firm decided to capitalize the cost of the new machine because it produces a higher-quality finished product with fewer manufacturing errors while keeping the carrying amount of the old machine on its books.

This suggests that the firm does not know the carrying amount of the old machine but assumes it is near $0.