Exercise 10-4 Grouper Co. both purchases and constructs various equipment it use

ID: 2512814 • Letter: E

Question

Exercise 10-4 Grouper Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017 Purchase Cash paid for equipment, including sales tax of $6,600 Freight and insurance cost while in transit Cost of moving equipment into place at factory Wage cost for technicians to test equipment Insurance premium paid during first year of operation on this equipment Special plumbing fixtures required for new equipment Repair cost incurred in first year of operations related to this equipment $138,600 2,640 4,092 5,280 1,980 10,560 1,716 Construction Material and purchased parts (gross cost $264,000; failed to take 2% cash discount) $264,000 Imputed interest on funds used during construction (stock financing) Labor costs Allocated overhead costs (fixed-$26,400; variable-$39,600) Profit on self-construction Cost of installing equipment 18,480 250,800 66,000 39,600 5,808 Compute the total cost for each of these two pieces of equipment. Purchase equipment Construction equipment

Explanation / Answer

Grouper Co

Computation of total cost for each of these two pieces of equipment:

Purchase Equipment –

Purchase Equipment -

Cash paid for equipment

$138,600

freight and insurance cost while in transit

$2,640

cost of moving equipment into place at factory

$4,092

wage cost for technicians to test equipment

$5,280

special plumbing fixtures required for new equipment

$10,560

Total purchase cost

$161,172

Notes:

Equipment cost would include all expenses incurred to bring the asset into the working condition. Hence the cost comprise sales tax, freight and insurance while in transit, cost of moving equipment into place at factory, wage cost for technicians to test equipment and special plumbing needed to bring the equipment into working condition.

Costs such as insurance premium and repair cost are of recurring type and hence are regarded as revenue expenditure. These expenses are hence not included in the capital expenditure of the equipment.

Construction Equipment –

Construction -

material and purchased parts (after 2% cash discount)

$258,720

labor costs

$250,800

allocated fixed overhead costs

$26,400

profit on self-construction

$39,600

cost of installing equipment

$5,808

Total construction equipment cost

$581,328

Notes:

Materials and purchased parts gross cost $264,000

Less: 2% cash discount $5,280

Materials and purchased parts after discount $258,720

Imputed interest on funds used during construction is not direct cost, it’s a financing cost.

Labor costs are direct and hence are included.

Allocated fixed costs are included, however variable costs vary with production levels and hence do not form part of construction equipment