Question

Anchor Company purchased a manufacturing machine with a list price of $94,000 and received a 2% cash discount on the purchase. The machine was delivered under terms FOB shipping point, and transportation costs amounted to $4,000. Anchor paid $5,700 to have the machine installed and tested. Insurance costs to protect the asset from fire and theft amounted to $7,400 for the first year of operations. What is the cost of the machine

Answer 1

Answer:

$101,820

Explanation:

the total cost basis of the machine:

• purchase price = $94,000 x 98% = $92,120
• transportation costs = $4,000
• installation costs = $5,700
• insurance costs = $0 (operating expense)

total asset basis = $101,820

A business can capitalize certain necessary costs when it acquires an asset and they include freight, installation and insurance costs. But the insurance costs that can be capitalized are those incurred to insure an asset while it is being transported or installed, after the installation is over any insurance costs are operating costs.