Exercises and Problems
Trudy Company incurred the following costs.
1. Sales tax on factory machinery purchased $ 5,000
2. Painting of and lettering on truck immediately upon purchase 700 3. Installation and testing of factory machinery 2,000
4. Real estate broker’s commission on land purchased 3,500 5. Insurance premium paid for first year’s insurance on new truck 880 6. Cost of landscaping on property purchased 7,200
7. Cost of paving parking lot for new building constructed 17,900 8. Cost of clearing, draining, and filling land 13,300
9. Architect’s fees on self-constructed building 10,000
Items of property, plant and equipment should be initially recorded at cost. Costs include all costs in which are necessary to assure the assets are in working condition for their intended use. This includes original purchase prices along with costs of site preparations, delivery, handling, installation, professional fees included for architects and engineers with estimations for dismantling and removing these assets for restoration of original site. Knowing managements intended use comes in very handy and is extremely important when applying this cost principle. Cost principle assets are to be recorded at cost this equals the value which was reciprocated at the time of the attainment. Assets in the United States like land and buildings appreciate in value over a given period of time these items do not get revalued for future financial reporting. Shipping costs form part of the asset costs, however; the cost of accidental insurance or any type of insurance during the later periods are recurring expenses which benefit and is not received for short term, less than a year therefore; it does not get included within the costs of assets.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2010). Financial accounting
(7th ed.). Hoboken, NJ: John Wiley & Sons.