Company Incurred The Following Costs: Sales Tax On Factory

Company Incurred The Following Costs1sales Tax On Factory

Trudy Company incurred various costs related to its operations and asset acquisitions. The costs include sales tax on factory machinery, painting and lettering on trucks, installation and testing of machinery, real estate broker’s commission, insurance premiums, landscaping, paving, land clearing, and architect’s fees. The assignment instructs to identify the appropriate accounts for each of these costs, indicating how Trudy Company would record them in its accounting books.

Paper For Above instruction

When a company incurs costs related to acquiring assets or undertaking specific projects, proper classification and recording are essential to ensure accurate financial statements and compliance with accounting standards. In the case of Trudy Company, an analysis of each cost helps in determining the correct account debits in the company's general ledger.

First, the sales tax on factory machinery purchased, amounting to $5,000, is a critical cost associated with acquiring a long-term asset. According to accounting principles, sales tax on equipment should be capitalized as part of the machinery's cost because it enhances the asset's value and utility (Weygandt, Kimmel, & Kieso, 2019). Therefore, the appropriate account to debit is "Machinery" or "Equipment." This inclusion reflects the total amount paid to get the machinery ready for use.

The painting of and lettering on the truck upon purchase is considered a cost necessary to prepare the asset for use and thus is capitalized as part of “Vehicles” or “Trucks” under property, plant, and equipment (PPE). Similar reasoning applies to the installation and testing of machinery. These activities are essential to bring the asset into operational condition and are classified as part of the asset's historical cost, debited to the respective asset account (Gitman, Joehnk, & Billingsley, 2018).

The real estate broker’s commission on land purchased, amounting to $X (not specified), is directly attributable to acquiring the land and should be capitalized as part of the land's cost. This treatment aligns with the accounting standards that state all costs necessary to acquire title and prepare the land for its intended use are capitalized (FASB, 2010). The debit would be to "Land".

The insurance premium paid for the first year's insurance on a new truck is generally considered an operational expense and should be debited to “Insurance Expense” or “Insurance” for the period, as it does not add value to the truck nor extend its useful life beyond the current period (Weygandt et al., 2019).

The costs of landscaping on the property purchased and paving the parking lot for the new building are both capital improvements that enhance the value and usability of the property. These costs are typically capitalized as part of the land improvements or building improvements, depending on their nature and location (Kieso, Weygandt, & Warfield, 2019). For landscaping on land, the amount should be debited to “Land Improvements” or “Land.” The paving of the parking lot, connected to the new building, is also a land improvement and should be debited to “Land Improvements.”

The cost of clearing, draining, and filling land is necessary to prepare the land for construction or use and is accounted for as part of the land's cost. These costs directly improve the land and are typically debited to “Land” (FASB, 2010).

Finally, the architect’s fees on a self-constructed building totaling $10,000 represent the design work necessary to plan the construction. Such costs are capitalized as part of the building’s construction cost, debited to “Building” or “Construction in Progress” during construction (Jones & Roberts, 2017). Once construction is complete, the total is transferred to “Building” as a fixed asset.

In summary, each cost is associated with a specific asset or expense account based on its nature and its role in acquiring or preparing an asset for use. Proper classification ensures accurate financial reporting and compliance with accounting standards.

References

• FASB. (2010). Accounting Standards Codification (ASC). Financial Accounting Standards Board.
• Gitman, L. J., Joehnk, M., & Billingsley, R. (2018). Principles of Managerial Finance. Pearson.
• Jones, G. R., & Roberts, C. (2017). Management Accounting: An Introduction. Wiley.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting. Wiley.
• Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Financial Accounting: IFRS Edition. Wiley.