The invoice price of a machine is $50,000. Various other costs relating to the a

Question

The invoice price of a machine is $50,000. Various other costs relating to the acquisition and installation of the machine including transportation, electrical wiring, special base, and so on amount to $7,500. The machine has an estimated life of 10 years, with no residual value at the end of that period.

The owner of the business suggests that the incidental costs of $7,500 be charged to expense immediately for the following reasons.

1. If the machine should be sold, these costs cannot be recovered in the sales price.
2. The inclusion of the $75,00 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
3. Charging the $7,500 to expense immediately will reduce federal income taxes.

Discuss each of the points raised by the owner of the business.

Explanation / Answer

First of all, the machine was not purchased with the intent of selling it immediately, but rather to use in the company's daily operations for its entire economic life. Second, again, the intent of the acquisition is not to sell the machine in the market. Moreover, capitalizing the expenses necessary to put the machine to use is a generally accepted accounting practice. Third, book and tax accounting are two different matters. In computing the company's federal income tax liability, the company can elect to expense the entire acquisition cost and the incidental expense at once while in it books, these costs are capitalized and amortized over 10 years.

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