Your business acquired 4 pieces of equipment @ $12,000 each, for cash, with an e

Question

Your business acquired 4 pieces of equipment @ $12,000 each, for cash, with an estimated 4 year life and no residual value. At the time of the purchase it was decided that one will be used by the company, and you believe you will get most of the benefit at the beginning of its life. The second piece of equipment will be used on your magic carpet research and development (R&D) project, and it has not been determined if it can be used on other R&D projects in the future. It was determined that there was a high demand for the remaining 2 pieces of equipment, so you listed them in your catalog for $25,000 each. Please answer the following questions. : 1. What are the 4 possible accounting treatments? 2. What additional information do you need. 3. How would each accounting treatment appear on the income statement and balance sheet.

Explanation / Answer

Req. 1: The possible accounting treatments could be : First, treated as total expense at cost $12000 in the first year as used by the company and taken all benefits in beginning of its life. Second, treated as the assets at cost $12000 in R & D project and get depreciated completely in first four years. The last two are taken in the company's Finished Goods Inventory at the fixed price $25000 each.

Req. 2: It is not known on first one, how early benefits were taken.

Req. 3: First one is treated as expense in income statement totally in the first year and it does not appear in the balance sheet.

Second one is treated as assets in the balance sheet and yearly depreciation is considered as expense in the income statement.

Last two are treated as current assets as inventory and taken to the Balance Sheet. They will be booked as revenue when sold in the Income Statement.

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