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    What are the problems of incorrectly capitalizing an item

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    What are the ethical and accounting ramifications of incorrectly capitalizing an item?

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    There can be several problems with an improperly applied capitalization policy. First, an explanation of what a capitalization policy is: In the strict definition of an asset, it is an item with a life beyond one year. If the policy is followed strictly, a new stapler would qualify as an asset because it certainly will last beyond one year. To modify the rules, the concept of materiality has been introduced to allow a new stapler to be expensed, because it simply isn't material enough to capitalize, ...

    Solution Summary

    The solution first explains how companies develop a policy for deciding what to capitalize and what to expense. There are some examples for application of the a policy. Next the solution give five business conditions and the ultimate effects to the organization for the improper capitlization.