Question

Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017. Purchase Cash paid for equipment, including sales tax of $5,000 $105,000 Freight and insurance cost while in transit 2,000 Cost of moving equipment into place at factory 3,100 Wage cost for technicians to test equipment 4,000 Insurance premium paid during first year of operation on this equipment 1,500 Special plumbing fixtures required for new equipment 8,000 Repair cost incurred in first year of operations related to this equipment 1,300 Construction Material and purchased parts (gross cost $200,000; failed to take 2% cash discount) $200,000 Imputed interest on funds used during construction (stock financing) 14,000 Labor costs 190,000 Allocated overhead costs (fixed-$20,000; variable-$30,000) 50,000 Profit on self-construction 30,000 Cost of installing equipment 4,400 Compute the total cost for each of these two pieces of equipment.

Answer 1

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                                                         8,000

Total Cost of Purchased Equipment                                  122,100

Constructed Equipment

                                                                                                 $

Construction materials/parts purchased                           200,000

Finance cost                                                                           14,000

Labor                                                                                     190,000

Overhead cost                                                                        30,000

Cost of installing equipment                                                     4,400

Total Cost of Constructed Equipment                              438,400

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.