Identify costs directly attributable to the new workshop extension Steps:

• Include building cost of $65,000 as it is for constructing the new extension.
• Include legal fees of $6,000 as they relate to acquiring or setting up the new extension.
• Exclude air conditioning system of $2,800 since it is specified for the original workshop.
• Exclude decorating costs of $1,100 and$800 as they are repairs or maintenance, not capital costs for the extension.
• Add qualifying costs: $65,000 +$6,000 = $71,000.

Why C is correct:

• Under accounting principles, the cost of a new asset includes purchase price (building) and directly attributable costs like legal fees, totaling $71,000 for the extension.

Why the others are wrong:

• A includes irrelevant original workshop costs like air conditioning, understating extension-specific expenditure.
• B incorrectly adds partial original workshop items, mixing extension and non-extension costs.
• D overincludes decorating for the new extension, which is not capitalizable as part of the asset cost.

Final answer: C