Question

Smithfield Hotel recently purchased new exercise equipment for its exercise room. The following information refers to the purchase and installation of this equipment.

1.) The list price of the equipment was $42,000; however, Smithfield qualified for a special discount of $5,000. It paid $10,000 cash, and issued a 3-month, 12 percent note payable for the remaining balance. The note, plus accrued interest charges of $750, was paid promptly at the maturity date.

2.) In addition to the amounts described in 1, Smithfield paid sales taxes of $2,100 at the date of purchase.

3.) Freight charges for delivery of the equipment totaled $600.

4.) Installation and training costs related to the equipment amounted to $900.

5.) During installation, one of the pieces of equipment was accidentally damaged by an employee. Smithfield paid $400 to repair this damage.

6.) As soon as the equipment was installed, the hotel paid $3,200 to print brochures featuring the exercise room’s new, state-of-the-art exercise facilities.

Instructions:

a.) In one sentence, make a general statement summarizing the nature of expenditures that qualify for inclusion in the cost of plant assets such as exercise equipment.

b.) For each of the six numbered paragraphs, indicate which items should be included by Smithfield Hotel in the total cost added to its Equipment account. Also briefly indicate the proper accounting treatment of those items that are not included in the cost of the equipment.

c.)Compute the total cost added to the hotel’s Equipment account.

d.) Prepare a journal entry at the end of the current year to record depreciation on the exercise equipment. Smithfield Hotel plans to depreciate this equipment by the straight-line method (half-year convention) over an estimated useful life of five years. Assume a zero residual value.

Answer 1

Solution:
a. the nature of expenditures that qualify for inclusion in the cost of plant assets such as exercise equipment would include
cost of purchase and all incidental cost incurred to bring the equipment at site including installment until it is ready to use.
b. treatment of all items
	1. After discount cost is $ 37,000 (42000 - 5000) and that should be the cost
	interest charges are not to be included in the cost
	2. Sales tax of $ 2100 is the part of cost of equipment
	3. Freight charges for delivery of the equipment totaled $600 is to be included in the cost
	4. Installation and training costs related to the equipment amounted to $900 is to be included in the cost
	5. This is the repair expense and not to be included in the cost of equipment. It was an accidental damage and had nothing to do with installation process
	6. Brochures printing is a sort of advert and hence not to be included in the cost of equipment
c. Total Cost of equipment
	Purchase Cost			42000
	Less: Discount			-5000
	Add: Taxes			2100
	Add: Freight			600
	Add: Installation			900
	Total Cost			40600
d.	Journal to record depreciation
	Total Cost			40600
	Less: Residual Value			0
	Cost to be depreciated			40600
	Useful life			5
	Method used			SLM
	Depreciation each year			8120	(40600/ 5)
	Journal Entry
	Depreciation - Debit				8120
	Exercise equipment- Credit					8120