Question

Which of the following is NOT true?

Multiple Choice

• The cost to rebuild the engine of a machine after 5 years of use would be a capital expenditure

• The cost to repair a 2 year old machine would be debited to repairs expense.

• The cost to ship a new piece of equipment would be debited to shipping expense

• Cost to assemble equipment before use would be a capital expenditure.

Answer 1

Wrong Option - 3. The cost to ship a new piece of equipment would be debited to Shipping Expense.

The cost to ship a new piece of equipment would not be debited to shipping expenses rather it will be capitalized and added to the cost of the asset.

Elements of Cost at the time of initial recognition: -

The cost of an asset comprises: -

• Purchase Cost/ Acquisition Cost/ Construction Cost Including import duties and non refundable taxes (after deducting trade discounts and rebates)
• Site Preparation Costs (For Ex. discounted cost of dismantling and restoring the site)
• Cost which is directly attributable to bringing the asset to the necessary location and condition
• The obligation  that an entity incurs either when the asset is acquired or as a consequence of having used the item.

As, the shipping expenses are directly attributable to bring the asset the the necessary location and condition, these are capitalized at the initial recognition.

1. Cost to rebuild the engine of a machinery after 5 years of use would be a capital expenditure as these will significantly impact the economic benefit to be received from an asset.

2. As the repair expenditure would not significantly impact the economic benefit that are to be received from an asset, these are debited to Profit & Loss Account.

4. Cost to assemble the equipment before use is a directly attributable cost to bring it to condition necessary for it to be capable of operating in the manner intended by management.