Question

Orion Flour Mills purchased a new machine and made the following expenditures:

Purchase price

$65,000

Sales tax

5,500

Shipment of machine

900

Insurance on the machine for the first year

600

Installation of machine

1,800

The machine, including sales tax, was purchased on account, with payment due in 30 days. The other expenditures listed above were paid in cash.

Required:

Record the above expenditures for the new machine.

Answer 1

Answer:

When buying PPE, the way to record it is to capitalize every expense that enabled the PPE to be brought to the location required and then set up for use. This includes the actual cost of the machine, the sales taxes (part of purchases price so must be included), the shipment of the machine as well as installation costs.

The Insurance paid (prepaid) is an expense for the period and so will not be capitalized.

Total cost of the machine therefore is;

= 65,000 + 5,500 + 900 + 1,800

= $73,200

Only the machine and the sales tax were purchased on account.

= 65,000 + 5,500

= $70,500

The rest in cash.

Journal Entry is

DR Machinery $73,200

DR Prepaid Insurance $600

CR Cash $3,300

CR Accounts $70,500

(To record purchase of equipment)