A company purchases a new piece of manufacturing equipment that it expects to use for the next eight years. How should the cost of this equipment be treated in the company's financial records under standard accounting practice?
Expense the entire cost in the period in which the equipment is purchased.
Defer cost recognition until the equipment is sold or disposed of.
Record the cost as an operating lease expense and recognize it evenly each period.
Capitalize the cost as a fixed asset and depreciate it over its useful life.
The cost should be treated as a capital expenditure because the equipment provides economic benefits over multiple periods. It is recorded on the balance sheet as a fixed asset and systematically allocated to expense through depreciation over its useful life. Immediately expensing the full cost is reserved for operating expenses that benefit only the current period, while deferring recognition until sale or treating it like a lease misstates both the balance sheet and income statement.
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