Question

Mark's Markers purchased a new machine to use in the manufacturing process for $2,500. The sales tax was an additional $150 and the shipping charges were $200. One month after using the machine, a small part broke and needed repair. The cost of the repair was $900. How will Mark's Markers treat the costs for tax purposes?

A. The cost of $2,700 will be capitalized and depreciated over the asset's life. The repairs and tax of $1,050 will be expensed immediately.
B. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.
C. The cost of $2,500 will be capitalized and depreciated over the asset's life. The other costs of $1,250 will be expensed immediately.
D. The cost of $2,650 will be capitalized and depreciated over the asset's life. The shipping and repairs of $1,100 will be expensed immediately.

Answer 1

Mark's Markers will capitalize the initial machine cost, sales tax, and shipping charges totaling $2,850, and depreciate over the asset's life. The $900 repair will be expensed immediately. The correct option is B. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.

Step-by-step explanation:

For tax purposes, certain costs associated with purchasing new equipment can be capitalized and depreciated, while others are expensed immediately.

In the scenario involving Mark's Markers, the initial purchase price of the machine ($2,500), sales tax ($150), and shipping charges ($200) are typically considered part of the capital cost of the equipment.

These are added together to be capitalized and depreciated over the asset's life. The total capitalized cost is $2,850. However, subsequent repair costs, such as the $900 for a part repair one month after purchase, are treated as expenses and are typically deducted in the year they are incurred.

Therefore, the correct treatment for tax purposes would be Option B: The cost of $2,850 will be capitalized and depreciated over the asset's life, and the repairs of $900 will be expensed immediately. The correct option is B. The cost of $2,850 will be capitalized and depreciated over the asset's life. Repairs of $900 will be expensed immediately.