Question

The following expenditures relating to plant assets were made by Watkens Company during the first 2 months of 2014.Paid $7,000 of accrued taxes at the time the plant site was acquired.Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit.Paid $850 sales taxes on a new delivery truck.Paid $21,000 for parking lots and driveways on the new plant site.Paid $250 to have the company name and slogan painted on the new delivery truck.Paid $8,000 for installation of new factory machinery.Paid $900 for a 1-year accident insurance policy on the new delivery truck.Paid $75 motor vehicle license fee on the new truck.Instructions:Explain the application of the historical cost principle in determining the acquisition cost of plant assets.List the numbers of the transactions, and opposite each indicate the account title to which each expenditure should be debited.

Answer 1

Answer:

(a) The following points explain the application of the cost principle to plant assets.

1.Under the cost principle, the acquisition cost for a plant asset includes all expenditures necessary to acquire the asset and make it ready for its intended use.

2.Cost is measured by the cash paid in a cash transaction or by the cash equivalent price paid when non cash assets are used in payment.

3.The cash equivalent price is equal to the fair market value of the asset given up or the fair market value of the asset received, whichever is more clearly determinable.

(b) Following is the list of transactions and items to be debited.

1. Land

2. Factory Machine

3. Delivery Truck

4. Land Improvements

5. Delivery Truck

6. Factory Machine

7. Prepaid Insurance

8. License Expense

Explanation: