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18 February, 00:55

United Van Lines purchased a truck with a list price of $250,000 subject to a 6% discount if paid within 30 days. United Van Lines paid within the discount period. It paid $4,000 to obtain title to the truck with the state and an $800 license fee for the first year of operation. It paid $1,500 to paint the firm's name on the truck and $2,500 for property and liability insurance for the first year of operation. What acquisition cost of this truck should United Van Lines record in its accounting records? Indicate the appropriate accounting treatment of any amount not included in acquisition cost.

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  1. 18 February, 02:58
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    Answer: Acquisition cost of Truck for United Van Lines = List Price - Discount Availed + Truck title fees paid + Cost incurred on painting the Truck

    = $ 250,000 - (.06 i. e. 6%) * $ 250,000 + $ 4,000 + $ 1500

    = $ 250,000 - $ 15,000 + $ 4,000 + $ 1,500

    = $ 240000 + $ 5500 = $ 245500

    License fees of $ 800 and property and liability insurance of $ 2,500 will both be debited to United Van Lines P&L A/c.

    Explanation: The items of list price, discount availed, truck title fees paid and cost incurred on painting the Truck are all included in capital expenditure i. e. one time expenditure of United Van Lines, thus they are all included in the acquisition cost of the truck.

    The items of license fees and property and liability insurance of $ 800 and $ 2,500 respectively are both revenue expenditures i. e. repetitive expenditures, hence they both will be debited to P&L A/C as follows-

    License fees a/c Dr. $ 800

    Property and liability insurance a/c Dr. $ 2,500

    To P&L a/c $3,300

    (License fees and property and liabilty insurance paid for 1st Year)
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