Question: Cost of Assets and the Effect on Depreciation Early in its

Cost of Assets and the Effect on Depreciation Early in its first year of business, Key Inc., a locksmith and security consultant, purchased new equipment. The acquisition included the following costs:
Purchase price ...........$168,000
Tax ....................16,500
Transportation ............4,400
Setup* ..................1,100
Operating cost for first year.....26,400
*The equipment was adjusted to Key’s specific needs. The bookkeeper recorded the asset Equipment at $216,400. Key used straight-line depreciation. The equipment was expected to last ten years with zero residual value.

1. Was $216,400 the proper amount to record for the acquisition cost? If not, explain how each expenditure should be recorded.
2. How much depreciation did Key report on its income statement related to this equipment in Year 1? How much should have been reported?
3. If Key’s income before the costs associated with the equipment is $55,000, what amount of income did Key report? What amount should it have reported? You can ignore income tax.
4. Explain how Key should determine the amount to capitalize when recording an asset. What is the effect of Key’s error on the income statement and balance sheet?

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  • CreatedJanuary 12, 2012
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