Question

Salvia Company recently purchased a truck. The price negotiated with the dealer was $40,000. Salvia also paid sales tax of $2,000 on the purchase, shipping and preparation costs of $3,000, and insurance for the first year of operation of $4,000. At what amount should the truck be recorded on the balance sheet prior to recording depreciation expense

Answer 1

The amount the truck should be recorded on the balance sheet prior to recording depreciation expense is $45,000.

Step-by-step explanation:

The insurance premium of $4,000 would not be added to the cost of the truck. Insurance is usually for one year, it will be treated as prepayment and amortized over one year.

Based on IAS 16 Property, Plant and Equipment, the cost of an asset includes directly attributed costs that are necessary to bring the assets to the condition intended by management. The cost components, based on the standard, are:

• purchase price plus import duties and taxes
• any directly attributable cost to bring the sset to the location and condition to be capable of operating in the manner intended by management
• the initial estimated of the cost of dismantling and removing the item and restoring the site on which it is located

Based on the above, the cost is $40,000 + $2,000 + $3,000 = $45,000