CA 10-6 - CA 10-6 In general, the inclusion of the $7,500...

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CA 10-6 In general, the inclusion of the $7,500 as part of the cost of the machine is justified because the primary purpose in accounting for plant asset costs is to secure an equitable allocation of incurred costs over the period of time when the benefits are being received from the use of the assets. These costs—both the $40,000 and the $7,500—are much like prepaid expenses, to be matched against the revenue emerging through their use. The purpose of accounting for plant assets then is not primarily aimed at determining the fair valuation of the asset for balance sheet purposes, but proper matching of incurred costs with revenue resulting from use of the assets. 1. It may be true that these installation costs could not be recovered if the machine were to be sold. This is not important, however, because presumably the machine was acquired to be used, not to be sold. Assuming approximately equal utilization of the machine in each of the ten years, the owner properly could allocate $4,750 (10% of $47,500) against each year’s operations. If the
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This note was uploaded on 06/06/2010 for the course ACCOUNTING ac505 taught by Professor Khan during the Spring '10 term at DeVry Fremont.

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CA 10-6 - CA 10-6 In general, the inclusion of the $7,500...

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