Question

Determining Amount of PP&E to Capitalize AMP Corporation purchased new manufacturing equipment with an invoice cost of $90,000, plus sales tax of 6% on the selling price. AMP also incurred a freight charge of 10% of the selling price to obtain the equipment and paid an outside consultant $900 for installation of the equipment. AMP retained the services of the consultant for an additional few days for $1,800 to help employees train on the equipment's operations. Insurance premiums increased by $540 for the year related to the equipment usage. The company also received $1,800 for the residual value of the machine that was replaced. Determine the amount AMP should capitalize for equipment related to this purchase. $ X Check

Answer 1

A company can capitalize costs incurred directly related to construction or acquisition of a fixed asset up to when it is ready for use, expenses such as labor, sales taxes, transportation, testing, and materials used in the construction of the capital asset can be capitalize.

Here following expenses should capitalize with the purchase cost of Equipment-

Purchase Cost of equipment	$          90,000.00
Sales tax (6% of Invoice vale)	$            5,400.00
Freight (10% of Invoice vale)	$            9,000.00
Installation Cost	$                900.00
Total Amount to be capitalized	$      1,05,300.00

** It is assumed that can't take credit on sales tax paid.

Hope you understood, Thank you.