What is included in the cost basis of a long-lived asset? Explain for at least two types of such assets.
The cost basis of a long-lived asset includes all the costs that are necessary to bring the asset to its intended use. Let's discuss two types of long-lived assets and the components included in their cost basis:
1. Building: When calculating the cost basis of a building, the following components are typically included:
- Purchase price: This includes the actual cost of acquiring the building, including any additional expenses like legal fees or brokerage commissions.
- Renovations and improvements: If any renovations or improvements were made to the building after its purchase, these costs are also added to the cost basis. Examples may include adding extra rooms, upgrading infrastructure, or installing new fixtures.
- Installation or assembly costs: If there were any expenses incurred in setting up or assembling the building, such as excavation costs, foundation pouring, or site preparation, these costs are also included.
2. Machinery and equipment: The cost basis of machinery and equipment typically consists of:
- Purchase cost: This includes the amount paid to acquire the machinery or equipment, including any delivery or transportation costs.
- Installation costs: Expenses incurred during the process of installing or assembling the machinery or equipment, such as electrical wiring, plumbing, or specialized labor costs, are included.
- Testing and trial runs: If any testing or trial runs were necessary to ensure the machinery or equipment is operational, the costs associated with these activities are also added to the cost basis.
It's important to note that each situation may be unique, and additional costs may be included in the cost basis depending on the specific circumstances. It's recommended to consult accounting professionals or refer to applicable accounting standards for more comprehensive guidance.