Question

Crane Corporation acquired new equipment at a cost of $110,000 plus 8% provincial sales tax and 4% GST. (GST is a recoverable tax.) The company paid $1,780 to transport the equipment to its plant. The site where the equipment was to be placed was not yet ready and Crane Corporation spent another $520 for one month’s storage costs. When installed, $400 in labour and $260 of materials were used to adjust and calibrate the machine to the company’s exact specifications. The units produced in the trial runs were subsequently sold to employees for $330. During the first two months of production, the equipment was used at only 4% of its capacity. Labour costs of $2,900 and material costs of $3,000 were incurred in this production, while the units sold generated $5,300 of sales. Crane paid an engineering consulting firm $11,100 for its services in recommending the specific equipment to purchase and for help during the calibration phase. Borrowing costs of $740 were incurred because of the one-month delay in installation.

Determine the capitalized cost of the equipment.

Capitalized cost of the equipment

Answer 1

Answer :

Step 1 : calculation of capitalized cost of equipment :

Particulars	Amount
Cost of equipment	$1,10,000
(+)8% provincial sales tax (non refundable tax) ($1,09,000 × 8% = $7,630	$8,800
(+)GST 4% ( recoverable tax )	$ 0
(+) Transportation cost	$1,780
(+) Storage cost	$520
(+) Labour cost	$400
(+) Material cost	$260
(-) sale proceeds out of output of trail run	($330)
(+) Consulting firm fee ( professional/technical fee)	$11,100
(+) Borrowing cost	$740
Total capitalized cost of equipment	$1,33,270

Note :

1) non refundablee taxes are considered for calculating capitalized cost of equipment and refundable taxes are not capitalized.

2) transportation and storage cost are treated as delivery and & handling charges so it is added while calculating capitalized cost of the asset.

3) labour and material cost are considered as site preparation cost which need to be added for arriving capitalized cost of thr asset

4)trail run expenses less sale proceeds of output in trail run are considered while arriving capitalized cost of asset. In the question trail expenses not given, only sale proceeds out of trail run is given so the same is deducted while calculating capitalized cost.

5) professional or technical fee incurred with respect to supervision of installation is added.

6) borrowing cost incurred due to delay in installation is considered as substantial time period taken for delivery and installation so it is permitted to capitalize.

7) expenses incurred and revenue generated during the production is not capitalized it is charged to P or L.