Essay- Tangible asset accounting treatment A company purchased 20 printers at $1

Question

Essay- Tangible asset accounting treatment

A company purchased 20 printers at $12,000 each for cash. Management has approved the following requests.  1. The sales team wants to use one as a demo unit on the floor for 3 months because they think it will help with sales. 2. The research department wants one to use as part of their work.  3. The accounting department wants one that they plan to use over the next 4 years. The rest will be sold to the public.

Please answer the following questions. :

1. What affect does the usage have on how the printers are accounted for in the books?

2.  What additional information do you need.

3. Based on the usage ( there are 4 alternatives) how would each accounting treatment appear on the income statement and balance sheet.

Explanation / Answer

.1. Printers can be accounted in the books as expense or assets or stock in trade

.A.If these are accounted as assets, the asset account will be debited and cash will be credited.

The journal entry is given below:

Account title & explanation

Debit

Credit

Printers (Assets)

$12,000

Cash

$12,000

(To record purchase of printers on cash)

This entry will affect the Balance sheet only by increasing asset and reducing cash. There will be no effect on Income statement( except as depreciation charged for the year)

.B If these are accounted as expense, the expense account will be debited and cash will be credited.

The journal entry is given below:

Account title & explanation

Debit

Credit

Expenses

$12,000

Cash

$12,000

(To record expenses on purchase of printers on cash)

This entry will affect the Balance sheet by reducing cash and Income statement by increasing expenses and reducing income.

.C. If these are accounted as stock in trade, the Inventory account will be debited and cash will be credited.

The journal entry is given below:

Account title & explanation

Debit

Credit

Inventory

$12,000

Cash

$12,000

(To record   purchase of printers on cash)

This entry will affect the Balance sheet by increasing Inventory and reducing cash.There will be no effect onIncome statement.

.2. Additional information needed:

.4 The alternatives are:

.a. If sales printers are scrapped after three months,

The accounting entry will be to charge the cost as selling expense of the year. Since the asset used for less than a year, it cannot be capitalized

The journal entry is given below:

Account title & explanation

Debit

Credit

Selling expenses

$12,000

Cash

$12,000

(To record selling expenses)

In balance sheet cash will be reduced and in Income statement expenses will increase and Income will reduce

If the printer is used for some other department for number of years (like the printer of accounts department used for 4 years)

The accounting entry will be to capitalise the printer expense and depreciate over the 4 years of use.

Account title & explanation

Debit

Credit

Printers (Assets)

$12,000

Cash

$12,000

(To record purchase of printers on cash)

In balance sheet Asset will increase and cash will decrease. There will be no effect on Income Statement (Except as depreciation charged for the year)

If the printer is sold as trade in stock at discounted price, the printer will be treated as inventory (like the balance printers to be sold to public)and the accounting entry will be:

Account title & explanation

Debit

Credit

Inventory

$12,000

Cash

$12,000

(To record   purchase of printers on cash)

This entry will affect the Balance sheet by increasing Inventory and reducing cash. There will be no effect on Income statement.

The research department printer can have different accounting entries.

If it is used for less than a year, it can be accounted as research costs. If it is used for number of years then it would be capitalized and only the depreciation will be treated as research costs.

Research costs can have two accounting treatments:

Account title & explanation

Debit

Credit

Printers (Assets)

$12,000

Cash

$12,000

(To record purchase of printers on cash)

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