The following expenditures relatig to plant assets were made by Newport Company

Question

The following expenditures relatig to plant assets were made by Newport Company during the first 2 months of 2012. 1. Paid $7,000 of accrued taxes at the time the plant site was aquired. 2. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit. 3. Paid $850 sales taxes on a new delivery truck. 4. Paid $21,000 for parking lots and driveways on the new plant site. 5. Paid $250 to have the company name and slogan painted on the new plant site. 6. Paid $8,000 for installation of new factory machinery. 7. Paid $900 for a 1-year accident insurance policy on the new delivery truck. 8. Paid $75 motor vehicle license fee on the new truck. a) Explain the application of the cost principle in determining the acquisition cost of plant assets. b) List the numbers of the transactions, and opposite each indicate the accoutn title to which each expenditure should be debited.

Explanation / Answer

(a) Explain the application of the cost principle in determining the acquisition cost of plant assets. An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site. Cost principle. Assets are recorded at cost, which equals the value exchanged at the time of their acquisition. In the United States, even if assets such as land or buildings appreciate in value over time, they are not revalued for financial reporting purposes. (b) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited. 1. Paid $5,000 of accrued 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. Machinery 3. Paid $850 sales taxes on new delivery truck. Motor vehicles 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. Upkeep of vehicle (or other suitable title) 6. Paid $8,000 for installation of new factory machinery. Machinery 7. Paid $900 for one-year accident insurance policy on new delivery truck. Insurance expense 8. Paid $75 motor vehicle license fee on the new truck. Licence expense

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