Kim Park a

Kim Park (A) Long-lived assets

1. True Star Electronics

Accounting for construction projects requires special methods in order to accurately present the real profits and losses during the construction process. During the construction process, various expenses are incurred in order to make the end product functional, these costs are also known to be the full cost of an asset. Various intermediate costs are incurred to make the end product functional. Construction accounting uses job order costing in order to allocate the direct and indirect costs for making the end product operational. Job order costing accounts for direct costs, labor costs, overhead costs and costs are required to make the project possible.

a. Architect’s fees are capitalized and are calculated towards the total construction cost of the additional wing. Typically, there are several methods to account for architect’s fees. If a new facility is being built, architects charge a fee based on a percentage of the total construction cost. In the situation where an addition to an existing facility is built, as in True Star Electronics’ case, architects will charge a higher percentage because of the complexity of the work. According to GAAP, architect’s fees should be recorded at historical costs and added towards the total cost of the construction. They should also be depreciated accordingly.

b. The cost of snow removal during construction should be considered as an expense because these are maintenance costs that are making the construction process possible. Basically the snow removal cost is a part of the cost of running the business.

c. Cash discounts earned from prompt payment on materials purchased for construction should be capitalized because this is treated as a reduction of the cost of purchased materials. Therefore, with cash discounts arising from timely payments, the company receives the products at a lower cost.

d. The cost of building a combined construction...