Question

(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

Purchase

Cash paid for equipment, including sales tax of \(5,000 \)105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during first year of operation 1,500

on this equipment

Special plumbing fixtures required for new equipment 8,000

Repair cost incurred in first year of operations related 1,300

to this equipment

Construction

Material and purchased parts (gross cost \(200,000;

failed to take 2% cash discount) \)200,000

Imputed interest on funds used during

construction (stock financing) 14,000

Labor costs 190,000

Allocated overhead costs (fixed—\(20,000;

variable—\)30,000) 50,000

Profit on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

Short answer

Cost of Purchase = $122,100

Cost of Construction = $440,400

Step-by-step solution

Meaning of Acquisition Cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common business contexts when this term is used: mergers and acquisitions, fixed resources, and client acquisition.

(a) Computing the cost of purchase

Purchase
Cash paid for equipment, including sales tax of $5,000	$105,000
Freight and insurance while in transit	2,000
Cost of moving equipment into place at the factory	3,100
Wage cost for technicians to test equipment	4,000
Special plumbing fixtures required for new equipment	8,000
Total cost	$122,100

The insurance premiums paid during the first year of operation of the equipment should be recorded as prepaid insurance and then adjusted to insurance expenditure, rather than being capitalized. The repair costs for the equipment incurred in the first year of its operation should be recorded as repair and maintenance expenses rather than being capitalized. Both of these expenses are for the time after the transaction has been made.

(b) Computing the cost of construction

Construction
Material and purchased parts	$196,000
Labor costs	190,000
Overhead costs	50,000
Cost of installing equipment	4,400
Total cost	$440,400

Note: Since the equipment should be reported at its cash equivalent price, the cost of material and acquired parts is lowered by the amount of cash discount not taken. The imputed interest on equity financing funds utilized during construction should not be capitalized or expensed. This expense is an unreported opportunity cost.

The self-construction profits should not be declared. The profit should be recorded only when the asset is sold.