Question

Crane Enterprises purchased equipment on March 15, 2018, for $81,030. The company also paid the following amounts: $550 for freight charges; $219 for insurance while the equipment was in transit; $1,690 for a one-year insurance policy; $2,012 to train employees to use the new equipment; and $2,521 for testing and installation. The equipment was ready for use on April 1, but the company did not start using it until May 1.

Crane has estimated the equipment will have a 10-year useful life with no residual value. It expects to consume the equipment’s future economic benefits evenly over the useful life. The company has a December 31 year end.

Calculate the cost of the equipment.

Cost of the equipment____________

Answer 1

Acquisition cost of an asset includes the cost of purchasing the asset coupled with any other cost for bringing the asset to its present location and condition in order to make it usable. However, the if the asset is ready for use but it was actually put to use at some later date, the cost incurred during this period cannot be capitalized rather it should be expensed off as a period cost.

Keeping this rule in mind, we should sum up the cost of the equipment as below:

Cost of purchase:                             $81030

Freight charges: $550

Insurance-in-transit: $219

Testing & installation: $2521

Total cost of equipment:              $84320

Employee training cost of $2012 and one-year usage insurance policy of $1690 are period cost and hence to be charged against revenue rather than being capitalized.

Since the equipment is having 10 year-long useful life with no residual value at the end, the depreciable base is spread over these 10 years evenly. Therefore, depreciation chargeable every year shall be: $8432 ($84320 / 10)