Reference no: EM13903936

Fixed asset measurement: which costs to capitalise?

Diafoirus, Purgon and Argan (two established doctors, one newly qualified) run a health clinic, Les Médecins Imaginaires (MI). Their practice is expanding and they decide to move the clinic's opera- tions to larger premises.

The building they acquire is 15 years old and in need of modernisation. It cost 200,000 to build and the seller carries it in its books at depreciated cost of 80,000. MI pay 250,000 for it. Legal costs associated with the purchase are 6,000. MI obtain a ten-year 7% loan of 150,000 from their bank to finance the purchase.

The building requires extensive alterations. Before moving in, MI spend 50,000 on these altera- tions. They create new office space by altering internal walls and fitting partitions. They lower the ceilings of many of the rooms in order to house cable for medical and computer equipment. The altera- tion work takes two months. At the same time, they replace the air-conditioning system at a cost of 20,000. Toinette, MI's office manager, who spends half her time supervising the alteration work, receives an annual salary of 42,000.

Within a month of moving in, MI receive an annual property tax assessment of 3,000 and vandals smash some windows on the ground floor of the building. The cost of replacing the glass, 2,500, is covered by insurance but MI decide to fit external roller blinds to all the windows at a cost of 12,000 in order to reduce the risk of further damage and to improve the security of the building.

Required

MI record fixed assets at (historical) cost. In your opinion, which of the above costs should be capitalised and why?