Question

On October 30, 2019, Afghan United Bank has purchased a brand new generator from a company at USA. The new generator has an invoice price of $5,000,000. Sales tax was computed at 12% of invoice price. Afghan United Bank has paid $100,000 as shipping cost to get generator from USA. After the generator arrives, installation cost of $150,000 is incurred, along with $50,000 testing costs. Compute the cost of generator and prepare journal entry to record purchase of generator.

Answer 1

Cost of Acquistion

Purchase Cost

5,000,000

Sales Tax

600,000

(5000000 X 12 %)

Shipping Cost

100,000

Installation Cost

150,000

Testing Cost

50,000

5,900,000

Date

Account Title

Dr

Cr

Generator

5,900,000

Bank

5,900,000

Capital expenditure includes costs incurred on the acquisition of a fixed asset and

any subsequent expenditure that increases the earning capacity of an existing fixed asset

The cost of acquisition not only includes the cost of purchases but also any additional costs incurred in bringing the

fixed asset into its present location and condition (e.g. delivery costs).

It include

Purchase costs (less any discount received)

Delivery costs

Sales Tax

Legal charges

Installation costs

Testing Cost

Up gradation costs

Replacement costs etc