Question

Larken Ltd purchased factory equipment with an invoice price of $50,000. Other costs incurred were freight costs, $1,300; installation wiring and foundation, $2,200; material and labor costs in testing equipment, $700; oil lubricants and supplies to be used with equipment, $500; fire insurance policy covering equipment, $1,400. The equipment is estimated to have a $5,000 residual value at the end of its 8-year useful life.

Required: Calculate the acquisition cost of the equipment
Select one:
a. $52,000
b. $50,000
c. $54,200
d. $51,300

Answer 1

The acquisition cost of the factory equipment is the sum of the invoice price, freight costs, installation wiring, and foundation, plus material and labor costs for testing, which totals to $54,200. Costs for oil lubricants, supplies, and insurance should not be included in the acquisition cost.

Step-by-step explanation:

To calculate the acquisition cost of the equipment for Larken Ltd, we need to add up all costs that are necessary to get the equipment ready for use. This includes the invoice price and any additional costs incurred that are directly attributed to bringing the equipment to a usable state. The costs are as follows:

• Invoice price: $50,000
• Freight costs: $1,300
• Installation wiring and foundation: $2,200
• Material and labor costs in testing equipment: $700

However, not all costs are capitalized. Costs such as oil lubricants, supplies, and fire insurance policy are not directly related to the acquisition and installation of the equipment. These costs should be recorded as expenses or prepaids but not as part of the equipment's cost.

The acquisition cost of the equipment is therefore the sum of relevant costs:

$50,000 (Invoice price) + $1,300 (Freight costs) + $2,200 (Installation) + $700 (Testing) = $54,200

The correct answer to the question is c. $54,200.