Question

Per company policy, tools with a purchase price greater than $1,000 are capitalized. What's the correct entry to record a tool purchase of $500?

A) Debit fixed assets $1000, Credit cash $1,000

B) Debt fixed asset $500, Credit tools expense $500

C) Debt fixed asset $500, Credit cash $500

D) Debt tools expense $1,000, Credit cash $1,000

E) Debt tools expense $500, Credit cash $500

Answer 1

The correct accounting entry for the purchase of a $500 tool, per company policy of capitalizing tools over $1,000, is a debit to tools expense and a credit to cash of $500.

Step-by-step explanation:

According to the company policy, only tools with a purchase price exceeding $1,000 are capitalized. If a purchased tool costs $500, which is below the capitalization threshold, it should be recorded as an expense rather than a fixed asset. Hence, the correct entry to record this tool purchase is:

Debit tools expense $500, Credit cash $500

This entry recognizes that the money has been spent (cash has decreased) and that the expenditure is for a tool that is essentially an immediate expense because its cost is below the company's capitalization limit.