Financial and Managerial Accounting Solutions

A. The cost of plant and equipment includes all expenditures that are reasonable and necessary in acquiring the asset and placing it in a position and condition for use in the operation of the business.

b. (1.) The purchase price of $250, 000 is part of the cost of the equipment. The list price ($275, 000) is not relevant, as this is not the actual price paid by Wilmet. The $4, 500 in interest charges are a charge for borrowing money, not part of the cost of the equipment. These interest charges should be recognized as interest expense over the 90-day life of the note payable.

(2.) Sales tax is a reasonable and necessary expenditure in the purchase of plant assets and should be included in the cost of the equipment.

(3.) Freight charges are part of the cost of getting the equipment to a usable location and, therefore, are part of the cost of the equipment.

(4.) To be used in college operations, the equipment must first be installed. Thus, normal installation charges should be included as part of the cost of the equipment. equipment.

(5.) The accidental damage to one of the terminals was not a “reasonable and necessary” part of the installation process and, therefore, should not be included in the cost of the equipment. The repairs do not make the equipment any more useful than it was before the damage was done. Therefore, the $500 cost of repairing the damage should be offset against revenue of the current period. (Technically, this amount should be classified as a loss in the current period. For practical purposes, however, it probably would be charged to an expense account such as Repairs and Maintenance.)

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(6.) Advertising is viewed by accountants as a revenue expenditure—that is, charged to expense when the advertising occurs. There is not sufficient objective evidence of future benefit for accountants to regard advertising expenditures as creating an asset.

c.

Expenditures that should be debited to the

Computing Equipment account:

Purchase price

250000

Sales tax

15000

Freight charges

1000

Installation charges

5000

271000

d.

Dec 31

Depreciation Expense: Computing Equipment

27, 100

Accumulated Depreciation: Computer Equip