Question

Bavarian Purity Corporation purchased equipment for $32,000. Bavarian Purity also paid $400 for freight and insurance while the equipment was in transit. Sales tax amounted to $240. Insurance, taxes, and maintenance the first year of use cost $1,000. How much should Bavarian Purity Corporation capitalize as the cost of the equipment?

a) $31,640
b) $32,640
c) $32,000
d) $32,400

Answer 1

Bavarian Purity Corporation should capitalize a total of $32,640 for the equipment, which includes the purchase price, freight and insurance during transit, and sales tax.

Step-by-step explanation:

The question you are asking pertains to the concept of capitalization in accounting, specifically what costs should be included in the capitalized cost of an asset. Bavarian Purity Corporation should capitalize all costs necessary to acquire the equipment and prepare it for use. This includes the purchase price of the equipment, freight charges, and sales tax, but not insurance, taxes, and maintenance for future use. Hence, the total capitalized cost would be the sum of the equipment purchase price ($32,000), freight and insurance during transit ($400), and sales tax ($240), which equals $32,640.