Question

Lemon Inc. bought equipment by paying $6,000 down and issuing the seller a 3-year, noninterest-bearing note payable in three annual end-of-year installments of $3,000 each, with 5% interest implicit in the purchase price. Lemon paid sales tax on the purchase of $900. Lemon also paid $750 in freight charges to have the machine delivered and another $500 to insure it while in transit. The seller charged Lemon $1,500 for setup and installation at Lemon’s factory, although that invoice is still outstanding under a 90-day, interest-free payment plan the Seller provided Lemon under a promotional offer. Wages Lemon paid its plant staff to test the equipment prior to placing it into production totaled $600, and insurance on the machine during its first month of operation was $200.

Required—Determine the balance that Lemon should report in its “Equipment” account. Show the amortization and how interest affects the account.

Answer 1

Balance for equipment account

Purchase price of machine = 6000+3000*3 = $15000

Sales tax =$900

Freight charges = $750

Insure while in transit = $500

Cost of setup and installation = $1500

Testing cost =$ 600

Cost of equipment to be recongnised in equipment account

15000+900+750+500+1500+600 = $19250

Purchase price of machine is $15000 , we shall add the loan note amount principal as purchase price .Lemon paid $6000 as down payment and rest as instaallment so the Purchase of machine will be $15000 . The interest payment does not affect the equipment account , it is debited as interest expense ,as the interest will occur in future and note in the time of purchase .So the interest payment does not affect the equipment account .

We will not take the insurance cost for first month of operation as the cost of equipment .Because it insured after the company start to operate its machine .If it was before the operation it is taken as cost of equipment.