Southwest Milling Co. purchased a front-end loader to move stacks of lumber. The

Question

Southwest Milling Co. purchased a front-end loader to move stacks of lumber. The loader had a list price of $140,000. The seller agreed to allow a 4 percent discount because Southwest Milling paid cash. Delivery terms were FOB shipping point. Freight cost amounted to $1,200. Southwest Milling had to hire a specialist to calibrate the loader. The specialist’s fee was $1,800. The loader operator is paid an annual salary of $60,000. The cost of the company’s theft insurance policy increased by $800 per year as a result of acquiring the loader. The loader had a four-year useful life and an expected salvage value of $6,000. Required Determine the amount to be capitalized in an asset account for the purchase of the loader. Record the purchase in general journal format.

Explanation / Answer

Answer:

As per normal rule of accounting, all the cost incurred up to the stage of its installation on ultimate location and in working condition should be capitalized.

Statement showing computation of capitalized cost of front-end loader

Journal entry in the books

Note 1: Salary paid to loader operator is an operating expense, so same amount will not be capitalized in the accounts.

Note 2: While recording journal entries, it is assumed that all the expense mentioned in question are fully paid in cash and entry is recorded on the basis of this assumption.

Srl No. Particular Amount (in $) 1 Purchase price 140,000 2 Less: cash discount (140,000 x 4%) (5,600) 3 = (1-2) Net purchase cost 134,400 4 Add: Freight cost 1,200 5 Add: specialist's fee payment 1,800 6 Add: Insurance cost 800 7 = (3+4+5+6) Total cost to be capitalized in the books 138,200

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