If an asset costs $25,000, how is it recorded?

If an asset costs $25,000, how is it recorded?

• A. Recorded as PP&E
• B. Recorded as expense
• C. Recorded as inventory
• D. Recorded as intangible asset

Answer: (A)

When a tangible asset is acquired for use in operations and is expected to benefit more than one year, it is recorded as property, plant, and equipment (PP&E) at cost on the balance sheet. The cost includes the purchase price plus any costs necessary to get the asset ready for use (such as shipping and installation). It then becomes a long-term asset and will be depreciated over its useful life, with depreciation expense recognized over time in the income statement. This asset isn’t recorded as an expense because doing so would recognize the entire cost in the current period, which would understate long-term assets and distort earnings. It isn’t inventory, since inventory is held for sale in the ordinary course of business, not for use in operations. It isn’t an intangible asset, as intangible assets are non-physical assets like patents or trademarks.

When a tangible asset is acquired for use in operations and is expected to benefit more than one year, it is recorded as property, plant, and equipment (PP&E) at cost on the balance sheet. The cost includes the purchase price plus any costs necessary to get the asset ready for use (such as shipping and installation). It then becomes a long-term asset and will be depreciated over its useful life, with depreciation expense recognized over time in the income statement.

This asset isn’t recorded as an expense because doing so would recognize the entire cost in the current period, which would understate long-term assets and distort earnings. It isn’t inventory, since inventory is held for sale in the ordinary course of business, not for use in operations. It isn’t an intangible asset, as intangible assets are non-physical assets like patents or trademarks.