Question

A company purchased new equipment for $60,000. The company paid cash for the equipment. Other costs associated with the equipment were: transportation costs, $1,000; sales tax paid $3,000; and installation cost, $2,500. The cost recorded for the equipment was:

Answer 1

Answer: The cost of the equipment is $66,500.

Explanation: Under IAS 16 Property, Plant and Equipment, the cost of an asset comprises:

• purchase price plus import duties and taxes
• any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management
• the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located

In the question, $60,000 was the purchase price, the transportation cost of $1,000 was necessary to bring the asset to the location intended by management, $3,000 was the sales tax and the installation cost of $2,500 was also necessary for the asset to function as intended by management. So all these costs would be capitalized as the cost of the equipment as $66,500.