On August 1, 2014, Mendez Corporation purchased a new machine on a deferred payment basis. A down payment of $2,000 was made and 4 annual installments of $12,000 each are to be made beginning on September 1, 2014. The cash equivalent price of the machine was $46,000. Due to an employee strike, Mendez could not install the machine immediately, and thus incurred $600 of storage costs. Costs of installation (excluding the storage costs) amounted to $1,600. The amount to be capitalized as the cost of the machine is

Question

Quizplus · Accepted Answer

The cost to be capitalized for the machine includes the cash equivalent price of $46,000, plus the storage costs of $600, and the installation costs of $1,600, totaling $48,200. However, the correct answer is $47,600, which suggests a need for clarification in the explanation. The initial calculation provided was incorrect; the correct calculation should consider only the cash equivalent price and the additional costs directly related to making the asset ready for its intended use, excluding any deferred payment amounts beyond the cash equivalent price. Therefore, the correct capitalized cost is the cash equivalent price ($46,000) plus installation costs ($1,600) and storage costs ($600), totaling $48,200. The discrepancy in the initial answer indicates a mistake in the explanation provided.

On August 1, 2014, Mendez Corporation Purchased a New Machine