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ACCA Applied Knowledge · Financial Accounting · Tangible non-current assets

Which of the following journal entries correctly records the capitalisation of $5,000 of own labour costs directly spent on constructing a company's own warehouse extension, previously charged to wages expense?

Debit Property, plant and equipment and credit Wages expense for $5,000. The labour was directly attributable to constructing the extension, so it is capital expenditure. Moving it out of wages expense corrects the earlier charge; no cash is involved because payment was already recorded.

  1. ADebit Wages expense $5,000; credit Property, plant and equipment $5,000
  2. BDebit Property, plant and equipment $5,000; credit Wages expense $5,000Correct
  3. CDebit Property, plant and equipment $5,000; credit Cash $5,000
  4. DDebit Depreciation expense $5,000; credit Wages expense $5,000

Explanation

The labour is a directly attributable cost of constructing the asset, so it should be debited to property, plant and equipment. The credit removes it from wages expense, which had been charged in error. Crediting cash would record a second payment.

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