Question

Concord Company purchased equipment on January 1 at a list price of $120700, with credit terms 2/10, n/30. Payment was made within the discount period and Concord was given a $2000 cash discount. Concord paid $5500 sales tax on the equipment, and paid installation charges of $1720. Prior to installation, Concord paid $4400 to pour a concrete slab on which to place the equipment. What is the total cost of the new equipment?

Answer 1

Cost of an asset include purchase price, installation costs and all expenses specifically incurred for acquiring the asset.

Here the cost of new equipment = 120700 + 5500 + 1720 + 4400 = $132,320

Explanation:

1. List price obviously forms part of cost.

2. Cash discount received is only an income but not a reduction in cost of asset. So it does not reduce cost of asset.

3. Sales tax paid is added to cost assuming that sales tax could not be recovered. If it could be recovered or taken as credit it should not form part of cost of equipment.

4. Installation Charges forms part of cost as they are necessary for working of equipment.

5. Concrete slab is poured because the equipment needs to be placed. Had the equipment is not purchased, Concord would not have poured concrete slab. So $4400 also forms part of cost of new equipment.