Question

ABC Inc. is a very mature corporation. On Feb. 1, 2014, the company bought the equipment at $1,000,000 by paying the cash amount of $500,000 and borrowing $500,000 from a bank. On that date, the company also paid sales taxes that are equal to 15% of the value of the equipment. In addition, the installation cost of $4,500 was also necessary to make the equipment ready for its intended use. The installation cost was incurred on Feb. 1, 2014. At the time of the purchase, the residual value was estimated at $50,000 and the useful life was estimated to be 5 years. On Dec. 31, 2016, the company sold the equipment and received $200,000 cash. It used part of the money, exactly, $145,000 to repay the remaining balance of the bank loan on the equipment. The company has a December 31 year-end.

On Feb. 1, 2014, what amount of Equipment should be reported as the long-term asset on the statement of financial position?

Answer 1

Assets that are classified as Long Term Assets like Plant and Equipment, Fixed Assets and Property are recognized at Historical cost. The cost of such assets will include all expenses that are required to put the asset into its intended use. Such costs include Installation charges, Taxes (that are not refundable), transportation costs and transit insurance. It does not include any borrowing costs such as interest expense.

Calculation of Cost of Equipment to be reported as Fixed Asset or Long Term Asset on Feb 1, 2014, is given below:

Purchase price	$1,000,000
Add: Sales tax (15% of $1,000,000)	$150,000
Add:Installation costs	$4,500
Total cost to be reported on Feb 1, 2014	$1,154,500