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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Cost of a Fixed Asset

Laurel Cleaners purchased an automatic dry cleaning machine for $165,000 from TGF Corporation on April 1, 2019. Laurel paid $25,000 in cash and signed a 5-year, 10% note for $140,000. Laurel will pay interest on the note each year on March 31, beginning in 2020. Transportation charges of $4,250 for the machine were paid by Laurel. Laurel also paid $1,500 for the living expenses of the TGF installation crew. Solvent, necessary to operate the machine, was acquired for $1,000. Of this amount, $800 of the solvent was used to test and adjust the machine.

Required:

1. Compute the cost of the new dry cleaning machine.

2. CONCEPTUAL CONNECTION Explain why you excluded any expenditures from the cost of the dry cleaning machine.

To determine

Concept introduction:

Cost:

The cost is defined as any amount incurred by the company to acquire the asset and get the asset to set in place and ready for use. Any expenditures that are not included as part of the cost of the equipment are expenses and the other costs that are included are capitalized.

Requirement 1:

Determine the cost of the new dry cleaning machine.

Explanation

The cost of an equipment generally includes the cost of the machine, installation costs, transportation, insurance during transportation and trial run cost and sales taxes. Now the cost of the machine includes the purchase price which is paid partly in cash and partly through notes payable, transportation cost, living...

To determine

Concept introduction:

Cost:

The cost is defined as any amount incurred by the company to acquire the asset and get the asset to set in place and ready for use. Any expenditures that are not included as part of the cost of the equipment are expenses and the other costs that are included are capitalized.

Requirement 2:

To explain why any expenditure is included or excluded from the cost of the machine.

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