The invoice price of a machine is $50,000. Various other costsrelating to the acquisition and installation of the machineincluding transportation, electrical wiring, special base, and soon amount to $7,500. The machine has an estimated life of 10 years,with no residual value at the end of that period.
The owner of the business suggests that the incidental costs of$7,500 be charged to expense immediately for the followingreasons.
1. If the machine should be sold, these costs cannot be recoveredin the sales price.
2. The inclusion of the $75,00 in the machinery account on thebooks will not necessarily result in a closer approximation of themarket price of this asset over the years, because of thepossibility of changing demand and supply levels.
3. Charging the $7,500 to expense immediately will reduce federalincome taxes.
Discuss each of the points raised by the owner of the business.
The invoice price of a machine is $50,000. Various other costsrelating to the acquisition and installation of the machineincluding transportation, electrical wiring, special base, and soon amount to $7,500. The machine has an estimated life of 10 years,with no residual value at the end of that period.
The owner of the business suggests that the incidental costs of$7,500 be charged to expense immediately for the followingreasons.
1. If the machine should be sold, these costs cannot be recoveredin the sales price.
2. The inclusion of the $75,00 in the machinery account on thebooks will not necessarily result in a closer approximation of themarket price of this asset over the years, because of thepossibility of changing demand and supply levels.
3. Charging the $7,500 to expense immediately will reduce federalincome taxes.
Discuss each of the points raised by the owner of the business.
