Question

On 21 June 20x1, the Large Mart store in Armidale purchased a new company car for its customer service department (called the “Nerd Herd”). The car costs $60,000 and was purchased from Coffs Harbour Car Sales. When purchasing the car, Large Mart took out a 1 year comprehensive insurance policy with NRMA insurance for a cost of $2,000. The invoice for the car allows Large Mart to deduct 5% of the cost of the car if the invoice is paid within 10 days. On 23 July 20x1, Large Mart paid the invoice from the Coffs Harbour Car Sales (after deducting 5% discount) as well as the invoice for the insurance of the car. Required: a) Determine if the amount paid for the comprehensive insurance of the car and the discount received from Coffs Harbour Car Sales influence the total cost of the car in Large Mart’s accounting system AND explain your decision. b) Provide all journal entries that are necessary in the books of Large Mart to account for the purchase of the car, and the payment of the invoice from Coffs Harbour Car Sales.

Answer 1

(a) Expenditure in relation to an asset influence the cost of the asset if:

1. It is incurred to bring the asset to its working conditions or intended use, or

2. It results in benefits more than the previously assessed capacity.

Amount paid for the comprehensive insurance of the car does not fall under any of the above. So, the cost of insurance should be charged as an expense to the profit and loss account. The same should NOT be capitalized.

The amount of discount received from the seller is directly related to the acquisition of the car. So, the same should be capitalized and reduced from the cost of the car.

(b) Journal entries:

Car a/c Dr.	60000
To Coffs Harbour Car Sales a/c		60000
[Being car purchased. ]
Coffs Harbour Car Sales a/c Dr.	60000
To Bank a/c		57000
To discount on purchase of car a/c		3000
[Being payment made.]
Discount on purchase of car a/c Dr.	3000
To Car a/c		3000
[Being amount of discount capitalized. ]