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29 April, 17:41

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

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Answers (2)
  1. 29 April, 18:52
    0
    Journal Entry

    Dr. Equipment $84,000

    Dr. Prepaid Insurance $700

    Cr. Cash $3,700

    Cr. Accounts Payable $81,000

    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
  2. 29 April, 20:49
    0
    The Answer given below;

    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.
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