Problem 1 - Accounting

Question

Kelly Melnik owns and operates Aaladin Print Co. During July, Aaladin 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\. Insurance while in transit 3\. Freight 4\. Special foundation 5\. Fee paid to factory representative for installation 6\. New parts to replace those damaged in unloading Costs related to used printing press: 7\. Fees paid to attorney to review purchase agreement 8\. Installation 9\. Repair of vandalism during installation 10\. Replacement of worn-out parts 11\. Freight 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

New Press: Costs 1-6 should be capitalized. Used Press: Costs 7, 8, 10, and 11 should be capitalized.

Step 1: Understanding Asset Costs for a New Printing Press

When acquiring a new asset like a printing press, costs directly related to bringing the asset to its intended use should be capitalized, or debited, to the asset account. This includes: sales taxes, freight charges, proceeds from installation, and preparation costs like special foundations.

Step 2: Identifying Capitalizable Costs for the New Press

For the new printing press, the costs that should be debited to the asset account are: sales tax on purchase price, insurance while in transit, freight cost, special foundation, fee paid to factory representative for installation, and the cost of new parts to replace those damaged.

Step 3: Understanding Asset Costs for a Used Printing Press

For a used asset, similar principles apply. These are costs incurred to make the asset ready for its intended purpose. This includes costs of installation, transportation (freight), and repair necessary due to its condition upon purchase.

Step 4: Identifying Capitalizable Costs for the Used Press

For the used printing press, the following costs should be debited to the asset account: fees paid to attorney to review purchase agreement, installation costs, replacement of worn-out parts, and freight. However, repairs for vandalism or reconditioning damage are typically expensed and not capitalized.

Key Concepts

Capitalizable Costs

When you acquire an asset, not all costs can be capitalized. Capitalizable costs are those expenses that are necessary to get the asset ready for its intended use. This means you need to consider the journey from purchase to operational use. These costs typically include the purchase price, along with other necessary expenses like taxes, shipping, installation, and any special setup required for operation.

This concept is crucial in accounting because it directly affects the financial statements. Capitalized costs are added to the balance sheet under assets and are usually subject to depreciation over the asset's useful life. This spreads the cost over time, rather than impacting the income statement immediately. Remember, only those costs that bring the asset to its working condition and location should be capitalized.

New Printing Press Costs

Acquiring a new printing press involves multiple costs that can be capitalized. When you're adding such equipment to your business, think about all the necessary payments to get it ready for business use.

Here are some costs you might have:

• Sales tax on the purchase price
• Insurance while the equipment is in transit
• Freight charges for shipping
• Building a special foundation for installation
• Installation fees paid to a factory representative
• Cost to replace parts damaged during unloading

All these expenses are part of the cost of the printing press and should be debited to the asset account. This total cost will then be subject to depreciation, helping the business spread out this financial burden over the equipment's lifespan.

Used Printing Press Costs

Even when acquiring a used printing press, many costs can still be capitalized. The key question is whether the cost contributes to getting the printing press ready for its intended use.

Some of these capitalizable costs include:

• Attorney fees for reviewing the purchase agreement
• Installation costs necessary for getting the press operational
• Freight charges to transport the equipment
• Replacement of parts that are worn-out

However, it is important to differentiate between necessary costs and repairs. It's typical to expense repairs from damages or reconditioning as they don't add value to the asset or extend its life. These are operational rather than capital expenses.

Asset Account Debiting

When you capitalize costs for a new or used printing press, these costs need to be debited to an asset account. This means you're recording them as an increase in your asset value.

The reasoning behind this is that these costs aren't just expenses for one period. Instead, they represent a long-term investment that will bear economic benefit for the company over time.

Consider this approach:

• Identify all costs directly related to making the asset ready.
• Debite these costs to the asset account, increasing the asset's overall value.
• Monitor the asset's value for depreciation over its useful life.

This method not only reflects a more accurate financial picture for the company but also matches costs with revenue over the life of the asset, aligning with accounting principles such as the matching principle.