Question

Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

534 Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment

Instructions

Purchase

Cash paid for equipment, including sales tax of $5,000 Freight and insurance cost while in transit
Cost of moving equipment into place at factory
Wage cost for technicians to test equipment

Insurance premium paid during rst year of operation on this equipment Special plumbing xtures required for new equipment
Repair cost incurred in rst year of operations related to this equipment

Construction

Material and purchased parts (gross cost $200,000; failed to take 2% cash discount) Imputed interest on funds used during construction (stock nancing)
Labor costs
Allocated overhead costs (xed—$20,000; variable—$30,000)

Prot on self-construction Cost of installing equipment

$105,000 2,000 3,100 4,000 1,500 8,000 1,300

$200,000 14,000 190,000 50,000 30,000 4,400

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

Purchase Acquisition Cost

Explanation of a how a cost should be reported if Not capitalized as part of the acquisition cost.

Self Constructed Cost

Explanation of how a cost should be reported if not capitalized as part of the acquisition cost

Answer 1

Purchase equipment	$122,100
Construction equipment	$440,400
Purchase
Cash paid for equipment, including sales tax of $5,000			$105,000
Freight and insurance while in transit			2,000
Cost of moving equipment into place at factory			3,100
Wage cost for technicians to test equipment			4,000
Special plumbing fixtures required for new equipment			8,000
Total cost			$122,100
Construction
Material and purchased parts ($200,000 × 0.98)	$196,000
Labor costs	190,000
Overhead costs	50,000
Cost of installing equipment	4,400
Total cost	$440,400
Ques 2
following if not capitalised should be debited to profit and loss account:
Purchase acquisition cost
Income statement
Expenses
Insurance expense	1500
repairs expense	1300
	2800
following if not capitalised should be debited to profit and loss account:
Construction
First of all there is a cash discount which has not been taken
this has to be reported at its cash equivalent price
for the rest , botha are not reported
imputed interest is nothing but opportunity cost
profit on self constructed asset