Question

In January, 2020, Harmony Inc. has the following expenditures related to manufacturing a new generation of widgets. Match each expenditure to the appropriate accounting treatment .
a. Takes possession of a widget-manufacturing machine. The vendor sends an invoice for $550,000.
b. Pays sales tax of $33,000 on the machine to the government. Pays employees $95,000 for research and development to c. Receives an invoice for $4,250 from the company that shipped the machine.
d. Pays employees $16,500 to install, customize, and test the widget-manufacturing machine.
e. Pays $3,000 for a one-year warranty insurance) plan for the machine, with coverage beginning when the machine is placed into service on February 1.
A. Capitalize to a different asset account.
B. Capitalize to the Machine account.
C. No accounting entry is necessary.
D. Expense. finalize the widget design.

Answer 1

Answer:

Harmony Inc.

Expenditure                                          Appropriate accounting treatment

a. Machinery $550,000                       B. Capitalize to the Machine  

b. Machinery $33,000                          B. Capitalize to the Machine

Research and development $95,000 D. Expense.

c. Freight-in (Machinery) $4,250         B. Capitalize to the Machine

d. Installation, etc (Machinery) $16,500 B. Capitalize to the Machine

e. Prepaid Insurance $3,000               A. Capitalize to a different asset account.  

Explanation:

1) Data and Analysis:

a. Machinery $550,000 Accounts payable $550,000

b. Machinery $33,000 Sales Tax Expense $33,000

Research and development $95,000 Cash $95,000

c. Freight-in (Machinery) $4,250 Accounts payable $4,250

d. Installation (Machinery) $16,500 Cash $16,500

e. Prepaid Insurance $3,000 Cash $3,000

b) The correct approach in capitalizing fixed assets and related costs is to follow this procedure: capitalize freight, sales tax, transportation, and installation, in addition to the fixed asset purchase cost.