Question

Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation. Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under long-term payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.

Short answer

Magilke record the equipment after reducing the cash discount from the price. It also shows the long-term credit payments at present value of consideration paid.

Step-by-step solution

Treatment of cash discount

Cost of equipment include the all cost that made to ready the equipment for production purpose. But some items subtracted from the cost of equipment like discount. Cash discount is subtracted from the price of assets because actual cost of the asset is price which is paid by the company in form of cash or cash equivalent.

Treatment of long-term credit payment plan

Amount recorded in the book for long-term credit payment for assets is based on the consideration exchanged between the parties. Cost of equipment is equal to the present value of that consideration.