Question

Southwest Milling Co. purchased a front-end loader to move stacks of lumber. The loader had a list price of $116,950. The seller agreed to allow a 4.50 percent discount because Southwest Milling paid cash. Delivery terms were FOB shipping point. Freight cost amounted to $2,070. Southwest Milling had to hire a specialist to calibrate the loader. The specialist’s fee was $1,020. The loader operator is paid an annual salary of $43,730. The cost of the company’s theft insurance policy increased by $2,160 per year as a result of acquiring the loader. The loader had a four-year useful life and an expected salvage value of $12,700.

Required

a. Determine the amount to be capitalized in an asset account for the purchase of the loader.

b. Record the purchase in general journal format.

Answer 1

The cost of an asset includes only costs required to purchase the asset and cost needed to bring the asset to its present location and condition. The costs after installation of asset unless significant are not capitalized.

Requirement a

Computation of amount of cost of loader to be capitalized

Details	Amount ($)
List price	116950
Less: Discount ( 4.50% of 116950)	5262.75
Add: Costs related to purchases
Freight	2070
Specialist fee	1020
Total cost of the loader	125303

Note that salary of loader operator and annual insurance expense are operating expenses and hence, they are not included in the cost of loader.

Requirement b

Date	Particulars	Debit	Credit
	Equipment- Loader	$ 125,303
	Cash		$ 125,303
	(To record the purchase of equipment)

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