Question

Q. Youngjin Home Appliances Co. in Seoul, Korea, purchases a delivery truck. Following are list of payments made by Youngjin when it acquires the truck (Currency in Korean won, ₩)

A. Cost of truck: ₩22,000,000 (10% value-added tax included)

B. Vehicle delivery cost: ₩500,000

C. Costs for painting company name and logo on truck’s body: ₩200,000

D. Municipal bond due and fees for registration and license plate: ₩800,000

E. Annual insurance policy: ₩600,000

F. Annual maintenance service plan: ₩400,000

Instruction: Explain how these costs would be accounted for (i.e., whether each of them should be included in the cost of truck or not and why).

Answer 1

ANSWER:

​​​​​​For accounting purposes, cost of an asset includes it's purchase price and all the necessary expenditure to prepare the asset for its intended use.

Some of these expenditures are transportation fees, sales tax, assembly and installation cost etc

Cost incurred for improvement of an asset should also be included in its cost.

In the above question, payment made by youngjin home appliances co include:

A. Cost of truck - 22000000, it should be included in the cost of the truck including sales tax paid (VAT- 10%) because purchase price should be capitalised.

B. Vehicle delivery cost- 500000, should be included in the cost of the truck because it's a transportation cost incurred for bringing the asset to its intended use.

C. Cost of painting company name and logo on trucks body - 200000 - should be included in cost of the truck because it is considered as an improvement cost.

D. Muncipal bond due and registration and licence - 800000- should not be included in the cost of the truck because these expenditures are considered as operational expenditure.

E. Annual insurance policy- 600000- should not be included in the cost of the truck because only insurance paid for shipment is included in the cost of the truck.

F. Annual maintenance service plan 400000- should not be included in the cost of the truck because only expenditure for bringing the asset for its intended use is included in the cost of the truck.

SUMMARY

All the necessary information has been provided.