Question

Equipment (Self-Constructed)
Material and purchased parts (gross cost $202,000; failed to take 2% cash discount; the company uses the net method of recording purchases of material and parts)		$202,000
Imputed interest on funds used during construction (Note: The company has no borrowing costs but it has calculated imputed interest on its equity/ share financing)		14,400
Labour costs for manufacturing the equipment		191,000
Overhead costs (fixed $19,300; variable $29,600)		48,900
Profit on self-construction		29,700
Cost of installing equipment		4,200

Calculate the cost of the machinery and the cost of the equipment.

(a)
(b)		Cost of the equipment		$enter a dollar amount

Answer 1

Computation of Cost of equipment:

Particulars	Amount($)
Cost of material and purchased parts	$202,000
Less: Cash discount @2%   (202000×2%)	(4040)
Cost of material and purchased parts less cash discount of 2%	197,960
Labour costs	191,000
Overhead costs	48,900
Cost of installing equipment	4,200
Total cost of Equipment	$442,060

Notes:

1.The imputed interest of equity(stock financing) are financial charges and must be shown in profit and loss account as they are revenue in nature and hence they should not be capitalised.

2.Profit on self construction is also not capital in nature and hence it must not be included in cost of equipment.