Question

Anchor Company purchased a manufacturing machine with a list price of $85,000 and received a 2% cash discount on the purchase. The machine was delivered under terms FOB shipping point, and freight costs amounted to $2,200. Anchor paid $3,000 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $3,800 for the first year of operations. Based on this information, the amount of cost recorded in the asset account would be:

Answer 1

Answer:

The initial cost of manufacturing machine to be capitalized as per International Accounting Standard 16 is $88,500.

Explanation:

IAS-16 states that the initial cost should include the Purchase Price Plus all the costs necessary to bring the asset into working condition. The discount should be deducted. Freight Charges and Installation Costs are directly attributable costs, these costs must be incurred to bring it to working condition. On the other hand, insurance is not required to make machine run so this cost should be written-off to Profit or Loss Statements as soon as incurred.

Purchase Price = 85,000 * .98 = $83,300

Add:               Freight Charges =     2,200

                      Installation Cost =     3,000

          Cost To Be Capitalized = $88,500

Thanks!