Problem 1 - Accounting

Question

Catherine Simpkins owns and operates Speedy Print Co. During February, Speedy Print Co. incurred the following costs in acquiring two printing presses. One printing press was new, and the other was used by a business that recently filed for bankruptcy. Costs related to new printing press: 1\. Sales tax on purchase price 2 Freight 3 Special foundation 4\. Insurance while in transit 5\. New parts to replace those damaged in unloading 6\. Fee paid to factory representative for installation Costs related to used printing press: 7\. Fees paid to attorney to review purchase agreement 8\. Freight 9\. Installation 10\. Repair of vandalism during installation 11\. Replacement of worn-out parts 12\. Repair of damage incurred in reconditioning the press a. Indicate which costs incurred in acquiring the new printing press should be debited to the asset account. b. Indicate which costs incurred in acquiring the used printing press should be debited to the asset account.

Step-by-Step Solution

Answer

Capitalize costs 1-6 for new press and costs 7, 8, 9, and 11 for used press.

Step 1: Understanding Asset Capitalization

An asset should be recorded at its cost, which includes all the expenses necessary to acquire the asset and prepare it for use. This means all expenditures directly related to making the asset ready for its intended use should be capitalized, that is, recorded as part of the asset cost.

Step 1: Analyze Costs for New Printing Press

For the new printing press, we consider costs that are necessary to bring the asset to its operational state. These include: 1. Sales tax on purchase price 2. Freight 3. Special foundation 4. Insurance while in transit 5. New parts to replace those damaged in unloading 6. Fee paid to factory representative for installation Each of these expenses is directly related to acquiring and preparing the printing press for use, so they should be capitalized (debited to the asset account).

Step 2: Analyze Costs for Used Printing Press

For the used printing press, the following costs should be considered for capitalization: 7. Fees paid to attorney to review purchase agreement (legal fees can be directly associated with the acquisition of the asset) 8. Freight (necessary to bring the asset to the place of use) 9. Installation (necessary to prepare the asset for use) 11. Replacement of worn-out parts (restores the asset to a usable condition) The repairs of vandalism and damage incurred during reconditioning do not add new value or extend the life beyond its original estimate and should be expensed, not capitalized.

Step 4: Determination of Capitalizable Costs

For the new printing press, costs 1 through 6 are capitalized because they are necessary to bring the asset to its operational state. For the used printing press, costs 7, 8, 9, and 11 are capitalized for the same reason. Other costs, such as repairs of vandalism and reconditioning damages, are recognized as expenses.

Key Concepts

Asset Acquisition

The term "Asset Acquisition" refers to the process of obtaining an asset, which, in this scenario, involves purchasing printing presses. This phase is critical as it sets the foundation for how these assets will be managed and recorded in the company’s books. When acquiring an asset, a business assesses both the immediate costs and the future benefits the asset provides. Some typical acquisition costs include:

• Purchase Price
• Legal Fees
• Transport Costs

To ensure that all relevant costs are captured, it’s important to distinguish between those necessary for acquisition and those for maintaining the asset after it’s obtained. The initial recognition of these costs forms the basis for capitalizing the asset. This step is essential for accurate financial reporting and sustainable business operations.

Capitalizable Costs

Capitalizable costs are those expenses that a company can add to the asset’s purchase price on the balance sheet. These costs are essential for the asset's preparation and functionality. In the case of Speedy Print Co., several costs fall into this category. For new assets, capitalizable costs could include:

• Sales tax on the purchase price
• Freight and transportation fees
• Foundation costs and insurance during transit

For used assets, they can include:

• Legal fees for purchase agreements
• Installation costs
• Replacement of worn-out parts

These costs are capitalized because they prepare the asset for use or bring it to a location ready for its intended purpose. Non-capitalizable costs, such as repairs due to vandalism, should be expensed in the period they occur, as they do not enhance or materially extend the asset's life or productivity.

Asset Preparation

Asset preparation involves bringing an asset to a state where it is functional and ready for use. This typically includes the installation, assembly, or configuring of the asset. For Speedy Print Co., the preparation of their printing presses comprises:

• Installation by factory representatives
• Replacement of parts damaged during unloading
• Ensuring the foundation is suitable to support equipment

These preparation activities are critical for ensuring that the asset functions as intended from the start. Costs incurred during this phase are generally capitalized as they add value to the asset by enabling its functionality. Detailed understanding of which preparation activities are vital helps in accurately reflecting an asset's value on the financial statements.

Asset Accounting

Asset accounting involves recording all transactions related to an asset in the financial statements. This ensures the company's balance sheet accurately reflects its assets' value. Key activities in asset accounting include:

• Recording capitalized costs in the asset account
• Depreciating the asset over its useful life
• Monitoring for impairment or changes in useful life

For Speedy Print Co., this means: - Logging the costs of acquisition and preparation in the books - Ensuring the costs align with the benefits these assets provide - Keeping track of the asset’s condition and adjusting its value as required Proper asset accounting allows for clarity in financial reporting and assists in making informed financial decisions, crucial for ongoing business success.