Question

Orion Flour Mills purchased a new machine and made the following expenditures: Purchase price $66,000 Sales tax 5,550 Shipment of machine 910 Insurance on the machine for the first year 610 Installation of machine 1,820 The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash. Required: Record the above expenditures for the new machine. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

The following are the journals to record the purchase transaction:

Debit Machine (Fixed asset)                         $74,280

Credit Cash                                                      $2,730

Credit Accounts Payable                               $71,550

(To record expenditure on machine)

Debit Prepayment                                              $610

Credit Cash                                                         $610

(To record prepaid insurance on machine)

Explanation:

Based on IAS 16 Property, Plant and Equipment, the cost of an asset comprises: (i) the purchase price plus import duties and taxes (ii) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in a manner intended by management; and (iii) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Using the basis above, the cost of the machine comprises the purchase price, sales tax, shipment cost and installation = $66,000 + $5,550 + $910 + $1,820 =  $74,280. The machine, including sales tax, was purchased on account to the tune of $71,550, the credit was recognized in accounts payable consequently. Since the remaining costs were paid for by cash, a credit of $2,730 was passed to Cash. However, the insurance cost is a prepaid asset and should not be capitalized with the asset. It would be amortized, on straight-line basis, over one year.