Accounting and Finance
Determine the costs that should be capitalized in the machinery account
Capitalization is the act of recognizing costs that provide a future economic benefit by setting up an asset account (Power Point). The costs that should be capitalized include:
Cost of raw materials used during trial runs of machinery $1,000
Additional materials, lumber, steel, and other supplies needed in installation $35,400
Wages paid to company employees to help unload and install the machinery during regular working hours $10,500
Trucking expenses related to the rigging company, which disassembled the machinery in Kentucky and transported it to Pawtucket $104,783
Legal bill related to writing the contract for the equipment $3,000
For any cost that was not capitalized, explain your reasoning
Cost to repair damage from machinery dropped from truck during unloading -- This cost is not included because it is self-inflicting by the company, or rather internally generated cost
ii. Cost of advertising the company's new manufacturing capability in national trade magazines. This cost will only be of benefit for a designated period and not for the economic life of the machinery iii. Casualty insurance policy on new machinery. This cost will only be of benefit for that period and not for the economic life of the machinery
iv. Interest paid on note to bank used to finance the purchase of machinery. This cost will only be of benefit for that period and not for the economic life of the machinery
c. Determine the depreciable cost of the machinery
The depreciable cost of the machinery includes the cost of...
Compute the depreciation expense for 2001 and 2002 using straight-line depreciation
Depreciation = Depreciable Cost / Number of Useful asset years
= (399,223 -- 30,000) / 20 years
i. Annual expense for 2001 is $18,461.15 x 3/12 = $4,615.29
ii. Annual expense for 2002 is $18,461.15
e. Compute the depreciation expense for 2001 and 2002 using double-declining balance depreciation
The depreciation under double declining method is calculated as:
Depreciable Cost / Asset's useful life in years x 2
Depreciable Cost = (original cost - accumulated depreciation)
i. Depreciation expense for 2001
Accumulated depreciation for 2001 = 0
= ((399,223 -0) / 20) x 2
= $39,922.3
ii. Depreciation expense for 2002
((399,223 -39,922.3) / 20) x 2
= $35,930.07
f. Assume that, during 2004, a large oven used to dry decorated prices needed a major repair costing $20,000. Should the cost of the repair be capitalized? Why or why not?
The cost of the large oven repair should be capitalized. This is because the repair can be classified to be an extraordinary repair, which implies that it is nonrecurring. Therefore, the cost should be added to the cost of the machine because the benefit that will arise will be more than just that particular period or year.
Chapter 13
Problem 13-5
a. What was the average issue price of the preferred stock…
