Question

Orion Flour Mills purchased a new machine and made the following expenditures: Purchase price $ 75,000 Sales tax 6,000 Shipment of machine 1,000 Insurance on the machine for the first year 700 Installation of machine 2,000 The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash. Required: Record the above expenditures for the new machine

Answer 1

The Answer given below;

Step-by-step explanation:

Purchase Price $75,000

Sales Tax $6,000

Shipment Cost $1,000

Installation Cost $2,000

Total Cost $84,000

The insurance cost is revenue expenditure therefore it is not capitalized.

Rest of expenditures are capital expenditures therefore all have been capitalized so that machine could be ready for use in business.

Answer 2

Journal Entry

Dr. Equipment $84,000

Dr. Prepaid Insurance $700

Cr. Cash $3,700

Cr. Accounts Payable $81,000

Step-by-step explanation:

Cost of asset includes all the cost involved in acquiring, installing and commissioning of the asset. In simple term all the costs that are necessary to make the asset operational are capitalised and added to the cost of the asset.

Cost of Asset

Purchase price $75,000

Sales tax $6,000

Shipment of machine $1,000

Installation of machine $2,000

Total Cost of Machine $84,000

Cash Payment = Shipment of machine + Insurance on the machine +Installation of the machine = $1,000 + $700 + $2,000 = $3,700

Accounts Payable = Machine price + Tax = $75,000 + $6,000 = $81,000