Question

2.5 Measurement of Acquisition Cost. United Van Lines purchased a truck with a list price of $250,000 subject to a 6% discount if paid within 30 days. United Van Lines paid within the discount period. It paid $4,000 to obtain title to the truck with the state and an $800 license fee for the first year of operation. It paid $1,500 to paint the firm’s name on the truck and $2,500 for property and liability insurance for the first year of operation. What acquisi- tion cost of this truck should United Van Lines record in its accounting records? Indicate the appropriate accounting treatment of any amount not included in acquisition cost.

Answer 1

Purchase price of the truck= list price* (1-discount rate)

= 250000*(1-0.06)= 235000

Acquisition cost of the truck = Purchase price of the truck+ title fees+ license fees+ painting charges

= 235000+ 4000+ 800+ 1500

=241300

The property and liability insurance will be taken as an expense rather than capitalizing it. This is because it does not increase or enhance the value of the capital asset. Moreover this is an optional expense and not mandatory for the usage of the asset.