Question

Fluffer Company incurred the following costs. 1. Sales tax on factory machinery purchased, $7,000. 2. Painting of and lettering on truck immediately upon purchase, $800. 3. Installation and testing of factory machinery, $2,500. 4. Real estate broker’s commission on land purchased $4,500. 5. Insurance premium paid for first year’s insurance on new truck $930. 6. Cost of landscaping on property purchased, $9,200. 7. Cost of paving parking lot for new building, $18,700. 8. Cost of clearing, draining, and filling land, $14,400. 9. Architect’s fees on self-constructed building, $11,000. Instructions:

a) Indicate to which account Trudy would debit each of the costs.

b) Explain why item 1 is not debited to an expense account.

c) Explain why items 7 and 8 are debited to different accounts.

Answer 1

a) Indicate to which account Trudy would debit each of the costs.

1. Sales tax on factory machinery purchased, $7,000.

Machinery account - as it is a part of the cost of purchasing the machinery.

2. Painting of and lettering on truck immediately upon purchase, $800.

Truck account, it being a cost to make the truck ready for use

3. Installation and testing of factory machinery, $2,500.

Machinery account, being a cost to make the machinery fit to use.

4. Real estate broker’s commission on land purchased $4,500.

Land account, being a cost to acquire the land.

5. Insurance premium paid for first year’s insurance on new truck $930.

Insurance expense, as it is an expenditure incurred subsequent to the purchase of the asset

6. Cost of landscaping on property purchased, $9,200.

Land improvements.

7. Cost of paving parking lot for new building, $18,700.

Land improvements.

8. Cost of clearing, draining, and filling land, $14,400.

Land account, as it is for making the land fit for the intended use.

9. Architect’s fees on self-constructed building, $11,000.

Building account, being an expenditure for bringing the build into existence.

b) Explain why item 1 is not debited to an expense account.

Sales tax charged is past of cost of the machinery, which is an asset.

c) Explain why items 7 and 8 are debited to different accounts.

Item 7: It is for improving the efficiency of the asset, but does not have the same perpetual life of the land to which it is attached. Hence, needs to be depreciated. So taken to a separate asset account called improvment.

Item 8: It is for making the land fit for use and hence to be added to the asset value.