Question

NEUSES Melinda Stoffers owns and operates ABC Print Co. During February, ABC incurred the following costs in acquiring two printing presses. One printing press was new, and the other was purchased from a business that recently filed for bankruptcy. a. Indicate which costs incurred in acquiring the new printing press (1-6 below) should be debited to the asset account. Item Debited to asset account 1. Fee paid to factory representative for installation 2. Freight 3. Insurance while in transit 4. New parts to replace those damaged in unloading 5. Sales tax on purchase price 6. Special foundation b. Indicate which costs incurred in acquiring the used printing press (7-12 below) should be debited to the asset account. Item Debited to asset account 7. Fees paid to attorney to review purchase agreement 8. Freight 9. Installation 10. Repair of damage incurred in reconditioning the press 11. Replacement of worn-out parts 12. Vandalism repairs during installation

Answer 1

Answer to first question in the list: Debited to asset account a) 1.Fee paid to factory representative for installation 2.Freight Item Yes Yes 3.Insurance while in transit Yes 4.New parts to replace those damaged in unloading 5.Sales tax on purchase price No Yes 6.Special foundation Yes b) 7.Fees paid to attorney to review purchase agreement 8.Freight Yes Yes 9.Installation Yes 10.Repair of damage incurred in reconditioning the press 11.Replacement of worn-out parts 12.Vandalism repairs during installation No Yes No Explanation: In a business firm, there will be many costs and expnses on a day-do-day basis while running its business operations. For accounting purpose, such costs and expenses shall be categorized as either capital expenditure or revenue expenditure incurred during normal course of business.

An expenditure shall be considered as capital expenditure if economic benefits from such costs are expected to flow to the firm for more than one year. If benefits are expected to be received within one year only, they are considered as revenue expenditure. Considering an expenditure as a capital expenditure is known as capitalization in accounting. The major reason for classifying costs as capital costs and revenue costs is that capitaized expenditures shall be reported as assets on firm's balance sheet whereas revenue expenditures shall be charged to income statement for the accounting year in which they are incurred. Once an expenditure is capitalized, it will be carried forward on firm's balance sheet till end of its expected economic life. Capitalized costs shall be depreciated using applicable depreciation method over its economic life every year so that book value at the end of each year will be equal to capitalized cost reduced by accumulated depreciation charged-off till the last of day of respective accounting period. Depreciation on capitalized cost is based on three aspects such as method of depreciation, estimated economic life and salvage value at the end of its economic life. When a capitalized cost is disposed off, gain or loss on such disposal shall be calculated by subtracting book value from sale value and it shall be reported on income statement for the accounting year in which such cost is disposed off. Capitalized cost includes invoice price less trade discount if any but increased by subsequent costs that are incurred till the time asset is ready for use such as cost of transportation, cost of installation, voyage insurance, etc. Costs incurred susequently after installation during later years are also qualified to be capitalized cost if they change assets basic structure or improve asset's production capacity or income generating capacity or increase asset's estimated economic life. Capitalized costs shall be debited to asset account; Other costs shall be charged to income statement as an expense for the reporting period in which such expenses are incurred.