Answer:
Worf Co.
Purchased Equipment
$
Cash (including sales tax) 105,000
Freight and Insurance while in transit 2,000
Cost of moving equipment into factory 3,100
Wage for testing 4,000
Special plumbing fixtures <u> 8,000</u>
Total Cost of Purchased Equipment <u> 122,100 </u>
<u></u>
Constructed Equipment
$
Construction materials/parts purchased 200,000
Finance cost 14,000
Labor 190,000
Overhead cost 30,000
Cost of installing equipment <u> 4,400</u>
Total Cost of Constructed Equipment <u> 438,400</u>
Explanation:
a) When calculating the cost of a purchased equipment, all cost spent to bring the equipment into a state and condition fit for use are included in the final cost to be capitalized as Property, plant and equipment in the balance sheet. This includes, sales tax, insurance and fright cost (note only insurance while in transit), testing cost and any other cost incurred in the process of getting the equipment into a usable state.
This means that insurance premium of $1500 the repair cost of $1300 would be treated as an expense incurred for the year
Dr Cr
Insurance expense 1500
Repair cost 1300
Cash 2800
b) For self-constructed equipment. The cost incurred to bring the equipment to a state and condition fit for use are all capitalized. This includes cost of materials and labor, cost of interest paid (on borrowings to finance the construction), cost of variable overhead (note that period cost or fixed overhead are not capitalized as they would be incurred even if construction did not take place) and cost of installation.
The profit on self-construction is only recognized when the equipment is sold.