Question

In January, Prahbu purchased a new machine for use in an existing production line of his manufacturing business for $90,000. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,500 to install the machine, and after the machine is installed, he pays $1,300 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On November 1, the critical test is complete, and Prahbu places the machine in service on the production line. On December 3, Prahbu pays another $3,300 to perform periodic quality control testing after the machine is placed in service.

How much will Prahbu be required to capitalize as the cost of the machine?

Answer 1

$93,800

Step-by-step explanation:

Incorporate, Installation costs and Critical Test Costs because this should be capitalized as it is business preparation costs.

Total Cost basis:

= Purchase price + Installation costs + Critical Test Costs

= $90,000 + $2,500 + $1,300

= $93,800

Therefore, the Prahbu will be required $93,800 to capitalize as the cost of the machine.