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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

A firm bought a machine for Rs 4,00,000. It spent Rs 20,000 on freight and Rs 30,000 on installation. It also spent Rs 10,000 on training the operators, and it incurred Rs 5,000 on repairs after the machine started working. Following the cost concept and the capital and revenue distinction, at what amount should the machine be recorded?

The machine is recorded at Rs 4,50,000. This is its purchase price of Rs 4,00,000 plus freight of Rs 20,000 and installation of Rs 30,000, which are costs needed to bring it to working condition. Training and later repairs are not charged to the asset.

  1. ARs 4,65,000
  2. BRs 4,50,000Correct
  3. CRs 4,60,000
  4. DRs 4,00,000

Explanation

The machine is recorded at purchase price plus freight plus installation: 4,00,000 + 20,000 + 30,000 = Rs 4,50,000. Training cost is not charged to the asset, and neither is the later repair. Rs 4,60,000 wrongly adds the training cost, and Rs 4,65,000 adds both the training and the repair.

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