Question

1. Fixed asset cost. IRS acquired some used computer equipment. Installation, $8K, Repair costs prior to use, $9K, the purchasing manager, with a salary of $54K spent one month evaluating equipment and completing the transaction. The invoice cost was $400K. The seller paid its salesman a commission of 4% and offered the buyer a 2% discount if paid with 60 days. Freight costs were $4K. Repairs during the first year of use were $10K. The IRS borrowed $300K at 10% to pay for the equipment. What’s it cost??

Answer 1

1. Fixed Asset Cost

As per AS10, Property, plant and equipment; any expense directly attributable to the acquisition of asset is capitalized to the cost of the asset.

(i) Installation of $ 8,000 is directly attributable to the asset. Hence the same is added to the cost of the asset

(ii) Repair cost to prior use $ 9,000 is the cost incurred before put to use of the asset. Hence the asset is capitalized with the repair cost

(iii) Any professional fees paid before put to use is capitalized to the asset. Hence the salary of purchasing manager $54,000 should be capitalized to the asset.

(iv) Invoice cost of $400,000 is capitalized which is the basic cost of the asset

(v) Any trade discounts and rebates offered by the seller needs to be deducted in the cost of the asset if included in the purchase price. Hence the discount of $8,000 ($400K*2%) is to be deducted in purchase price

(vi) Freight cost of $4,000 should be capitalized

(vii) Repairs during to the first year of use should not go for capitalization since the repairs are incurred after putting the asset into use. It should go for Profit and loss statement as an expense.

(viii) Interest @10% for loan of $300K is capitalized if the same satisfies the conditions of AS 16 Borrowing cost. As per AS16, Interest should be capitalized if it the same is incurred for qualifying asset. A qualifying asset is an asset which takes substantial period of time to get ready for its intended use or sale (Eg: Construction of building etc..). Since the asset is ready for use hence the interest should not be capitalized.

Equipment cost=$400,000+$8,000+$9,000+$54,000-$8,000+$4,000

                            =$467,000