Question

Oaktree Company purchased new equipment and made the following expenditures:

Purchase price	$	59,000
Sales tax		3,600
Freight charges for shipment of equipment		840
Insurance on the equipment for the first year		1,040
Installation of equipment		2,400

The equipment, including sales tax, was purchased on open account, with payment due in 30 days. The other expenditures listed above were paid in cash.

Required:

Prepare the necessary journal entries to record the above expenditures

Answer 1

Concepts and reason

Expenditure: Expenditure is the amount incurred or to be incurred to earn revenues to the organization. This expenditure incurred is reduced from the revenues earned to compute the net income or loss during a particular period. This expenditure is presented in the income summary account.

Expenditure incurred on a particular asset is capitalized by adding such expenditure to the cost of asset if such expenditure will enhance the performance of the asset.

Transactions: Transactions are the events that happen in a business for a particular period. These transactions form base for the accounting. These transactions are recorded in the books of accounts which help to prepare the ledger accounts.

Fundamentals

Journal entries: The transactions of an organization are recorded in the books of accounts through journal entries. Analyzing and journalizing of transactions is the second step in the accounting cycle. These journal entries are used to post the transactions into ledger.

Debit and credit rules: In a journal entry, accounts are debited and credited. In case of real accounts, journal entry is recorded using the principle “Debit what comes in and Credit what goes out”.

In case of personal accounts, journal entry is recorded using the principle “Debit the receiver and Credit the giver”.

In case of nominal accounts, journal entry is recorded using the principle “Debit all expenses and losses and Credit all revenues and gains”.

Calculate the amount to be capitalized as the cost of equipment as shown below:

Thus, the amount to be capitalized as the cost of equipment is.

Prepare the journal entry to record the purchase of equipment as shown below:

Prepare the journal entry to record the insurance payment as shown below:

Ans: