Question

one of the transaction confused me.

Transaction: the company bought equipment at 45 for cash to get discount of 50. The equipment to be replaced in 3 years at an expected cost of 60.

What does this 60 mean? why it is even more than the acquisition cost 45. Why does it not affect income statement ( the answer to the question just ignores this 60, but I do not why?)

Answer 1

In this requirement it is assumed that cost of the original equipment is 100 and discount allowed by the company is 50 so cost of the goods now is 50(100 - 50) and in order to prompt payment that in cash payment, it is then given additional discount 5 and mow the cost of the equipment for purchaser is 45 (50 - 5)

In summary it is like that

Original cost is 100

Discount offer is 50

Cost after discount is 50 (100 - 50)

Cash discount is 5 for prompt payment

Cost of purchase for the buyer is 45 (50 - 5)

Now, after 3 year the equipment is replaced by 60 also possible as original cost is 100 ,so now 60 the value which decline from the original cost.