Question

P 8- The following items relate to the acquisition of a new machine by the Bohn Group Inc. On the right-hand side are a number of possible accounting treatments; on the left-hand side are a number of independent accounting situations: Situation Accounting treatment Invoice price of new (1) Debit Machinery account machine, net of cash (2) Debit an expense account for discount offered the current period Cash discount on the above, (3) Debit an asset other than the which has not yet been machine and write-off the asset taken separately from the machine (4) Credit Machinery account Anticipated first year's (5) None of the above; explain savings in operating costs what account would be from use of new machine appropriate, if applicable. TWO-year service contract on operations of new machine paid in full Cost of materials used while testing new machine Cost of installing sound insulation in wall near machine so that nearby office employees will not be disturbed by it Cost of removing machine that new machine replaces. Required: Indicate the appropriate accounting treatment for each situation. Record any assumptions that you think might be necessary for any given situation necessary for any assuming treatment for

Answer 1

situation Accounting Treatment

1. Invoice price of new Assets, net of cash discount offered - Debit Machinery Account

2. Cash discount on the above, which has not yet been taken - None of the above

Cash discount Entries will be recognised at the time of payment before time.

3. Anticipated first year savings in operating cost from use of new machine - Debit an expense account for the current period

4. Two year service contract on operation of new machine paid in full - None of the above

Repairs a/c dr.

Prepaid Repairs A/c Dr.

To Cash/ Bank

5. Cost of material use while testing new machine - Debit Machinery Account

6. Cost of installing sound insulation - Debit the assets other than the machine and write off the asset separately from the machine

7. Cost of removing machine that new machine replaces - - Credit the Machinery Account