University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

275

Pages:

2
Author:

stud_ice13

Key Principles for Asset Cost • • • Initial Cost: The cost of acquiring the asset includes the purchase price, any discounts, and all expenditures necessary for setup, including shipping, installation, and testing. Inclusion Criteria: Expenditures added to the asset’s cost must be normal, reasonable, and necessary for the asset’s intended operational use. Expenses for repair due to damage, for instance, are excluded and expensed separately. Modifications: Customization or modification costs specific to the asset’s operational use are included in its recorded cost. Classes of Plant Assets 1. Machinery and Equipment Includes costs for purchase price, taxes, shipping, insurance during transit, and installation and testing. 2. Buildings The Building account consists of costs for purchase or construction, which includes purchase price, taxes, title fees, legal fees, and necessary renovations or repairs. Construction costs for internal projects include materials, labor, indirect overhead (heat, lighting, power), and specific expenses such as design fees and building permits. Note: Insurance during construction is included, but operational insurance is expensed. 3. Land Improvements Includes costs for improvements like parking lots, fences, lighting, and walkways, which are set up for the land’s intended use. Land improvements are depreciated over their useful lives. 4. Land Includes all costs necessary to prepare land for use, such as purchase price, commissions, title fees, taxes, surveying, grading, and government assessments. These costs are capitalized since they add value to the land. The cost to clear existing structures is also included after deducting salvage value from any recovered materials. Lump-Sum Purchase When multiple assets are purchased together, the cost is allocated among assets based on their relative market values. For instance, if $90,000 is spent to acquire both a building (appraised at $60,000) and land (appraised at $40,000), the costs are divided proportionally between them. Example Calculation for a New Machine Given payments to compute the cost of a machine: • Gross purchase price: $700,000 • • • • • • Sales tax: $49,000 Purchase discount: $21,000 (deducted) Freight cost (FOB shipping point): $3,500 Normal assembly costs: $3,000 Machine platform cost: $2,500 Maintenance parts: $4,200 (excluded as they are maintenance costs) Solution Calculation: Cost of machine = $700,000 + $49,000 - $21,000 + $3,500 + $3,000 + $2,500 = $737,000