On January 2, 2017, Botswana Inc.replaced its boiler with a more efficient one.The following information was available on that date: The old boiler was sold for $3,000.At what amount should Botswana capitalize the cost of the new boiler?

Question

On January 2, 2017, Botswana Inc.replaced its boiler with a more efficient one.The following information was available on that date:  The old boiler was sold for $3,000.At what amount should Botswana capitalize the cost of the new boiler?

Quizplus · Accepted Answer

Since the old boiler was sold for $3,000, the cost of the new boiler would be the purchase price plus any installation costs. However, the information given does not include the purchase price or any installation costs. Therefore, we cannot determine the exact cost of the new boiler.

However, we know that Botswana Inc. replaced its old boiler with a more efficient one, which implies that the new boiler was an improvement over the old one. Therefore, the cost of the new boiler should be capitalized (i.e., recorded as an asset on the balance sheet) rather than expensed immediately.

Based on this reasoning, we can eliminate choices A and B, as they are below the threshold for capitalization (which is typically around $5,000).

Choice D is above the threshold for capitalization, but it may be too high if the cost of the new boiler was close to $50,000.

Therefore, choice C ($49,000) is the best choice, as it is above the capitalization threshold but still within a reasonable range given the information we have.