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Accounting Depreciation Question - Capitalization v. Expense
Posted on 12/1/13 at 9:23 pm
Posted on 12/1/13 at 9:23 pm
Machine 765,000 invoiced April 1st 4/10 net 45
Invoice paid on April 15, in full.
Machine goes into production June 2nd.
Capitalize full 765k or capitalize net trade discount and expense the discount.
Someone is telling me that you expense the discount, but I'm pretty sure that is only if you put the machine into production before the discount window has expired, and you capitalize assuming you got the machinery on discount, then when you don't, you would expense. Since you know you didn't get the discount when the machine is put into production, you capitalize it fully.
What does the money board think?
Invoice paid on April 15, in full.
Machine goes into production June 2nd.
Capitalize full 765k or capitalize net trade discount and expense the discount.
Someone is telling me that you expense the discount, but I'm pretty sure that is only if you put the machine into production before the discount window has expired, and you capitalize assuming you got the machinery on discount, then when you don't, you would expense. Since you know you didn't get the discount when the machine is put into production, you capitalize it fully.
What does the money board think?
4
Posted on 12/1/13 at 9:28 pm to southernelite
Do your own homework?
Posted on 12/1/13 at 9:33 pm to southernelite
I am a CPA but can't remember. My guess (without putting forth any effort) is that you capitalize the total cost to place the asset into service. So you would capitalize the net trade discount.
Show your work and they will probably give you partial credit if I am wrong.
Show your work and they will probably give you partial credit if I am wrong.
Posted on 12/1/13 at 9:42 pm to southernelite
Shouldn't a Tulane fan named Southernelite know the answer?
Posted on 12/1/13 at 9:47 pm to LSURussian
It's just small caveat my teacher threw in a problem to be a dick. It doesn't really matter if I do it wrong. It won't have a material effect on my grade, so it's not a big deal.
Posted on 12/1/13 at 10:07 pm to southernelite
quote:
It won't have a material effect
This. You have the real world concept of accounting on lock. If I had a dollar for every time materiality came up in any conversation about a transaction...
Posted on 12/2/13 at 9:02 am to southernelite
For income tax purposes, you would begin depreciation when the machine is placed in service, June 2nd. The basis for depreciation would be your purchase price, minus any discounts actually received, plus any sales taxes, delivery and/or installation charges.
Under GAAP the concept is the same. Depreciation is based on cost not market value. A discount not taken is part of the purchase price.
Imagine how you would journalize this in the real world. When the invoice is received you would debit an asset account to track the acquisition of the machine for $765,000 and credit accounts payable for the same amount. If you took advantage of the discount you would record a $765,000 debit to accounts payable, a credit of $734,400 to cash and a reduction in the machine acquisition cost of $30,600 on the date you paid the invoice.
However, you didn't take advantage of the discount. So on June 2nd you should record an entry that debits fixed assets for $765,000 to reflect the machine being placed in service, and credit the machine acquisition account for $765,000. June 2nd is also the date from which you begin depreciating the machine. You would debit accounts payable for $765,000 and credit cash for $765,000 on the date you paid the invoice.
Under GAAP the concept is the same. Depreciation is based on cost not market value. A discount not taken is part of the purchase price.
Imagine how you would journalize this in the real world. When the invoice is received you would debit an asset account to track the acquisition of the machine for $765,000 and credit accounts payable for the same amount. If you took advantage of the discount you would record a $765,000 debit to accounts payable, a credit of $734,400 to cash and a reduction in the machine acquisition cost of $30,600 on the date you paid the invoice.
However, you didn't take advantage of the discount. So on June 2nd you should record an entry that debits fixed assets for $765,000 to reflect the machine being placed in service, and credit the machine acquisition account for $765,000. June 2nd is also the date from which you begin depreciating the machine. You would debit accounts payable for $765,000 and credit cash for $765,000 on the date you paid the invoice.
Posted on 12/2/13 at 9:16 am to Poodlebrain
quote:
Imagine how you would journalize this in the real world. When the invoice is received you would debit an asset account to track the acquisition of the machine for $765,000 and credit accounts payable for the same amount. If you took advantage of the discount you would record a $765,000 debit to accounts payable, a credit of $734,400 to cash and a reduction in the machine acquisition cost of $30,600 on the date you paid the invoice.
However, you didn't take advantage of the discount. So on June 2nd you should record an entry that debits fixed assets for $765,000 to reflect the machine being placed in service, and credit the machine acquisition account for $765,000. June 2nd is also the date from which you begin depreciating the machine. You would debit accounts payable for $765,000 and credit cash for $765,000 on the date you paid the invoice.
I can't even begin to wrap my head around this.
Posted on 12/2/13 at 9:29 am to Dooshay
Machine 765
---AP 765
AP 765
---Cash 734.4
---Machine 30.6
Poodle isn't there two ways to do the first JE? Like posting the machine as net of the discount when you buy it?
---AP 765
AP 765
---Cash 734.4
---Machine 30.6
Poodle isn't there two ways to do the first JE? Like posting the machine as net of the discount when you buy it?
This post was edited on 12/2/13 at 9:30 am
Posted on 12/2/13 at 10:01 am to reb13
I guess you could record your intent to take advantage of the discount, but then you'd be recording hypothetical transactions rather than actual. And you'd have to reverse the discount when it lapses to get back to reality. Seems rather complicated.
Also, think about the real world for a moment. How would an accounting department be set up to deal with a situation like this? You would need someone with a good bit of accounting knowledge to record the journal entries in any manner other than reflecting events as they occur. You'd probably not be able to have an accounts payable clerk record the transactions.
Also, think about the real world for a moment. How would an accounting department be set up to deal with a situation like this? You would need someone with a good bit of accounting knowledge to record the journal entries in any manner other than reflecting events as they occur. You'd probably not be able to have an accounts payable clerk record the transactions.
Posted on 12/2/13 at 10:29 am to Poodlebrain
quote:
Also, think about the real world for a moment.
Tell that to accounting professors
Posted on 12/2/13 at 10:53 am to reb13
quote:They already know that in the real world businesses do what is practical and cost effective. They know that businesses establish standard procedures for routine or recurring transactions taking into account the available resources for the accounting function. The purpose for problems like this one is to get you to think about how the events could be recorded, and what would be the impact on the company's financial statements.
Tell that to accounting professors
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