Question

12. On March 1, Alpha Beta Company purchased a new stamping machine with a list price of $34,000. The company paid cash for the machine; therefore, got a 5% discount, since all was paid once and cash. Other costs associated with the machine were: Transportation costs:$550 Sales tax paid Installation costs....: $450 Routine maintenance during the first month of operation, $500. :$1,360 Based on this information what would be the cost of the machine recorded in book2 Tip! Think about the costs that would be included in the cost and would not included in the cost Another meaning, what costs would be recorded as periodic expense, and what costs would be added to the cost of the machine. Calculation area: The cost of the machine recorded in book would be:

Answer 1

Amounts spent for acquiring a machine along with those costs incurred till the time the machine is ready for use shall be capitalized. These costs include cost of installation, cost of testing for its competancy before before such machine starts its actual production, costs incurred to increase machine's useful life, costs incurred to bring the machine to its current location (transaction costs), Sales tax paid, etc. Therefore, out of costs incurred with respect to acquiring machinery, list price ($34,000) reduced by cash discount of 5% on list price, Transportation cost ($550), sales tax paid ($1,360) and installation cost ($450) shall be capitalized As the routine maintenance expense incurred during first month of operation is a period expense, it shall not be capitalized. In other words, it is just an ordinary or routine maintenance expense incurred during normal course of business and so shall be expensed off. Therefore $34,000 Machine's list price Less: Cash discount received Net Purchase price paid for the machine Add: Transportation costs Sales Tax Installation Costs Total cost of machine recorded $1,700 [$34,000 x 5%) $32,300 $550 $1,360 $450 $34,660