Explaining the Nature of a Long-Lived Asset and Determining and Recording the Financial St...

Explaining the Nature of a Long-Lived Asset and Determining and Recording the Financial Statement Effects of Its Purchase (AP8-1)

On January 2, 2012, Cruz Company bought a machine for use in operations. The machine has an estimated useful life of eight years and an estimated residual value of $2,600. The company provided the following expenditures:

a. Invoice price of the machine, $85,000.

b. Freight paid by the vendor per sales agreement, $1,000.

c. Installation costs, $2,400 paid in cash.

d. Payment was made as follows:

On January 2:

The installation costs were paid in cash.

Cruz Company common stock, par $1 ; 2,000 shares (market value, $3.50 per share).

Note payable. $45,000; 11.5 percent due April 16, 2012 (principal plus interest).

Balance of invoice price to be paid in cash. The invoice allows for a 3 percent discount for cash paid by January 12.

On January 15:

Cruz Company paid the balance due.

Required:

1. What are the classifications of long-lived assets? Explain their differences.

2. Record the purchase on January 2 and the subsequent payment on January 15. Show computations.

3. Indicate the accounts, amounts, and effects (+ for increase and – for decrease) of the purchase and subsequent cash payment on the accounting equation. Use the following structure:

4. Explain the basis you used for any questionable items.