Magilke Industries acquired equipment this year to be used in its operations. Th

Question

Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation. Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under long-term payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.

- What if the time it took to get the equipment ready for use is a few weeks, would you capitalize interest then ? It would seem from my question above, that interest would not be capitalized in this situationh, however I am not sure.

Explanation / Answer

Cost of equipment includes purchase price, freight expenses, handling charges incurred, insurance of equipment, when the same is in transit, installation charges and cost of conducting trial runs. Thus cost includes all the charges which are incurred in acquiring the asset and preparing it for use. In the case given, equipment is purchased by availing a cash discount by making a down payment. The cash discount received whether availed or not will be considered as reduction in the cost of the asset. Similarly asset purchased on long term payment plan would be accounted at present value of the consideration exchanged between the parties at transaction date. In case, if equipment took time to get ready for use, interest paid on long term payment plans would be capitalized.

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