Question

In January, Prahbu purchased a new machine for use in an existing production line of his manufacturing business for $85,000. Assume that the machine is a unit of property and is not a material or supply. Prahbu pays $2,950 to install the machine, and after the machine is installed, he pays $1,600 to perform a critical test on the machine to ensure that it will operate in accordance with quality standards. On November 1, the critical test is complete, and Prahbu places the machine in service on the production line. On December 3, Prahbu pays another $3,900 to perform periodic quality control testing after the machine is placed in service. How much will Prahbu be required to capitalize as the cost of the machine

Answer 1

Answer: $89,550

Explanation:

When capitalizing the cost of a fixed asset, all the costs that were associated with acquiring it and setting it up for use are to be capitalized. This includes the cost of purchase, transportation and installation.

Periodic costs are to be expensed.

Cost to be capitalized:

= Purchase price + Installation price + Cost of critical test (this is needed to find out if the machine is operate appropriately so should be capitalized)

= 85,000 + 2,950 + 1,600

= $89,550