Question

Anchor Company purchased a manufacturing machine with a list price of $95,000 and received a 2% cash discount on the purchase. The machine was delivered under terms FOB shipping point, and transportation costs amounted to $4,200. Anchor paid $6,000 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $7,800 for the first year of operations. What is the cost of the machine

Answer 1

Cost of machine = $ 103,300

Step-by-step explanation:

The cost of Machine is:

List price $ 95,000

Less: Cash Discount (2%×95,000) $ (1,900)

Net Price $ 93,100

Add: Transportation costs $ 4,200

Add: Installation Charges $ 6,000

Cost of machine $103,300

Note: Cost of an new asset includes list price of asset, transportation costs, installation costs and insurance to protect the assets during transit.

Here insurance costs is not included as it is a expense to protect the asset after it has been installed.

Answer 2

The cost of the machine includes the list price of $95,000, transportation costs of $4,200, and installation and testing costs of $6,000.

This excludes the insurance costs of $7,800 and the cash discount of 2%.

Therefore, the total cost to be recognised in the books is $105,200 ($95,000 + $4,200 + $6,000).

Step-by-step explanation:

The list price is the major cost of the asset. The 2% cash discount is a finance income.

Transportation and installation costs are regarded as part of the cost of asset because they are incurred to bring the asset to use.

Any incidental cost that is incurred but not necessarily to bring the asset to usage is excluded from the cost of the asset. This is why the insurance cost is not included in the cost of the asset.

FOB shipping point means Free on Board Shipping Point. It is an incoterms term which specifies the point at which obligation, risk, and costs are assumed by the two parties. In this case, the buyer assumes obligation from the shipping point. Therefore, the transportation, installation, and testing costs are borne by Anchor Company.