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Cost of acquistion: capitalizable costs vs current expense

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The invoice of a machine is $40,000. Various other costs relating to the acquistion and installation of the machine including transportation, electrical wiring, special base, and so on amount to $7,500. The machine has an estimated life of 10 yrs, 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 following reasons:

1. If the machine should be sold, these costs can not be recovered in the sales price.
2. The inclusion of the $7,500 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
3. Charging the $7,500 to expense immediately will reduce federal income taxes.

Instructions:

Discuss each of the points made by the owner of the business.

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Solution Summary

The answer describes rationale behind capaitalising the cost incurred for installation of machine and not treating the same as current operating expense.

Solution Preview

The cost of the machine is the money paid by the owner for the purchase of machine and any other incidental expenses incurred to bring the machine into the factory site to install in its workable condition. This means if any transportation expenses, expenses on electrical wiring and any other installation charges should be capitalized along with the invoice price of the equipment.

However, the owner contends that this expenditure ...

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