Determining the Cost of Plant Assets and Depreciation
Smithfield Hotel recently purchased new exercise equipment for its exercise room. The following information refers to the purchase and installation of this equipment:
1. The list price of the equipment was $42,000; however, Smithfield qualified for a “special discount” of $5,000. It paid $10,000 cash, and issued a three-month, 12 percent note payable for the remaining balance. The note, plus accrued interest charges of $750, was paid promptly at the maturity date.
2. In addition to the amounts described in 1, Smithfield paid sales taxes of $2,100 at the date of purchase.
3. Freight charges for delivery of the equipment totaled $600.
4. Installation and training costs related to the equipment amounted to $900.
5. During installation, one of the pieces of equipment was accidentally damaged by an employee. Smithfield paid $400 to repair this damage.
6. As soon as the equipment was installed, the hotel paid $3,200 to print brochures featuring the exercise room’s new, state-of-the-art exercise 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 exercise equipment.
b. For each of the six numbered paragraphs, indicate which items should be included by Smithfield Hotel in the total cost added to its 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 hotel’s Equipment account.
d. Prepare a journal entry at the end of the current year to record depreciation on the exercise equipment. Smithfield Hotel plans 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.
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