Question

ABC Co recently spent $1,200,000 to acquire a piece of equipment. The accounting staff is unsure how to properly classify and record the purchase. One employee argues that future benefits of the equipment are unknown beyond the current year and that the expenditure should be expensed completely on the current year income statement. Another employee argues that the expenditure will benefit the current year plus two additional years and should be capitalized as a depreciable asset, depreciating it to a $0 salvage value using straight-line over a 3 year time period.

Show the impacts to the income statement, statement of cash flows, and balance sheet using these two alternatives. Ignore income taxes.

Answer 1

	Alternative 1	Alternative 2
Impact on Income Statement
Expenses: Year 1
Cost of the Equipment	1,200,000.00
Deprecitaion Expense		400,000.00
Statement of Cash Flow - Year 1
Cash Flow From Operating Expense
Cash paid for Expenses	(1,200,000.00)
Cash Flow from Investing Activities
Purchase of Equipment		(1,200,000.00)
Balance Sheet - Year 1
Property, Plant & Equipment	-	1,200,000.00
Less: Accumulated Depreciation		(400,000.00)
Balance	-	800,000.00