Determining the Cost of Plant Assets and DepreciationHamlet College recently purchased new...

Determining the Cost of Plant Assets and Depreciation

Hamlet College recently purchased new computing equipment for its library. The following information refers to the purchase and installation of this equipment:

1. The list price of the equipment was $285,000; however, Hamlet College qualified for an “education discount” of $25,000. It paid $50,000 cash for the equipment, and issued a three-month, 9 percent note payable for the remaining balance. The note, plus accrued interest charges of $4,500, was paid promptly at the note’s maturity date.

2. In addition to the amounts described in 1, Hamlet paid sales taxes of $15,000 at the date of purchase.

3. Freight charges for delivery of the equipment totaled $1,000.

4. Installation costs related to the equipment amounted to $5,000.

5. During installation, one of the computer terminals was accidentally damaged by a library employee. It cost the college $500 to repair this damage.

6. As soon as the computers were installed, the college paid $4,000 to print admissions brochures featuring the library’s new, state-of-the-art computing facilities.

Instructions

a. In one sentence, make a general statement summarizing the nature of expenditures that qualify for inclusion in the cost of plant assets such as computing equipment.

---

b. For each of the six numbered paragraphs, indicate which items should be included by Hamlet College in the total cost added to its Computing Equipment account. Also briefly indicate the proper accounting treatment of those items that are not included in the cost of the equipment.

---

c. Compute the total cost added to the college’s Computing Equipment account.

---

d. Prepare a journal entry at the end of the current year to record depreciation on the computing equipment. Hamlet College intends to depreciate this equipment by the straight-line method (half-year convention) over an estimated useful life of five years. Assume a zero residual value.