Question

New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month’s wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.

Short answer

The company only capitalized on the cost that adds value to the machine. Treatment of the payment of extra month wages is not proper. The company should not capitalize on the payment as this cost did not add value to the machine.

Step-by-step solution

Wages

Wages are recorded as the expense in the books of accounts. Wages is payment made to the employees or labor against their services.

Treatment Cost and Payment to dismissed employees

The company only capitalizes on that cost that adds value to the machine. So, the payment of the employee who is dismissed after paying a certain sum of money did not add to the company's cost. But if these wages are paid to the addition or improvement in the machine, then it is added to the machine's cost.