Bed Linens Company Acquires Real Estate, Machinery and Delivery Truck – Fixed Assets & Depreciation
Assets such as buildings, machinery, trucks, and land are called fixed assets. They are often designated on the balance sheet by the title, “Property, plant, and equipment.”
Fixed assets are expected to be of use to the business for several years. When a fixed asset is acquired, it is recorded at cost in accordance with the fundamental accounting concept known as the cost concept.
The “cost” of a fixed asset includes bed linens online all costs of acquiring and installing it to make it ready to use.
Bed Linens Company pays $100,000 for a piece of real property. It also pays $5,000 for brokerage, $6,000 for legal fees, and $10,000 to tear down the existing structures in order to make the land ready for its intended use. The real estate should be recorded in its books at $121,000.
In the case of machinery, transportation and installation costs are usually included. Bed Linens Company purchased a weaving machine paying $32,000. The company paid $1,000 in freight charges to transport it and$4,000 in installation charges. This machine should be entered in the accounts at $37,000.
If a business constructs a machine or building with its own personnel, all costs incurred in construction are included.
Bed Linens Company builds a new building for itself, using its own personnel. It spends $100,000 in materials, $300,000 in salaries and wages to persons engaged in the building’s construction and $200,000 in other cost. This building should be entered in the accounts at $600,000.
When a new fixed asset is acquired and an old asset (i.e., a trade-in) is used as part payment, the fair market value of the trade-in is part of the cost of the new asset. Thus, if Bed Linens Company buys a new delivery truck for $10,000 cash plus an old delivery truck the fair market value of which is $3,000, the new truck should be recorded at $13,000.
If the allowance given for the trade-in differs from the actual value of the trade-in, then the actual market value of the new asset should be used as the cost of the new asset.
Suppose that Bed Linens Company pays $10,000 cash for a new delivery truck and receives an allowance of $1,700, the new truck can be purchased for $11,500 cash. Its cost should be recorded as $11,50