Question

The following expenditures relating to plant assets were made by Prather Company during the first 2 months of 2017.

1. Paid $5,000 of accrued taxes at time plant site was acquired.

2. Paid $200 insurance to cover possible accident loss on new factory machinery while the machinery was in transit.

3. Paid $850 sales taxes on new delivery truck.

4. Paid $17,500 for parking lots and driveways on new plant site.

5. Paid $250 to have company name and advertising slogan painted on new delivery truck.

6. Paid $8,000 for installation of new factory machinery.

7. Paid $900 for one-year accident insurance policy on new delivery truck.

8. Paid $75 motor vehicle license fee on the new truck.

 

Instructions

(a) Explain the application of the historical cost principle in determining the acquisition cost of plant assets.

(b) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited.

 

 

Answer 1

a)	The following points explain the application of the cost principle to plant assets
	1)	unde the cost principle,the acqusition cost for a plant asset includes
		all expenditures necessary to acquire the asset and make it ready
		for its intended use
	2)	Cost is measured by the cash paid in a cash transaction or by the cash
		equivalent price paid when non cash assets are used in payment
	3)	the cash equivalent price is equal to the fair market value of the asset
		given up or the fair market value of the asset received ,whichever is
		more clearly determinable
b)
1)	Paid $5,000 of accured taxes at time plant site was acquired							Land
2)	paid $200 insurance to cover possible accident loss on new factory
	machinery while the machinery was in transit							Factory Machinery
3)	Paid $850 sales tax on new delivery truck							Delivery Truck
4)	paid $17,500 for parking lots and driveways on new plant site							Land Improvements
5)	paid $250 to have company name and advertising slogan
	painted on new delivery truck							Delivery Truck
6)	paid $8,000 for installation of new factory machinery							Factory Machinery
7)	paid $900 for one year accident insurance policy on new delivery
	truck							prepaid insurance
8)	paid $75 motor vehicle license fee on the new truck							License expense