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Capitalize direct labor costs

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My boss wants me to credit salary expense and debit inventory for work performed on an asset. The asset could sit on the books for a long time. This would be understating expenses. What is the correct way to allocate direct labor costs to an asset and still show an accurate salary expense? Is it ok to capitalize payroll costs?

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Solution Summary

Your tutorial is 173 and explains in everyday language the two times you can capitalize payrolls costs. The journal entries are shown and the discussion tells you how the costs ultimately get expensed.

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Yes, it is ok to capitalize certain payroll costs. It doesn't result in incorrect "salaries expense" because salaries expense only includes wages that are not used to build an asset.

There are two situations when you build an asset and therefore can capitalize payroll costs, direct labor in a ...

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Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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