ACCA Applied Knowledge · Financial Accounting · General ledger accounts and journal entries
Dunmore Co bought a machine for $40,000 plus delivery of $1,500, installation of $2,500 and a one-year maintenance contract costing $3,000, all paid in cash. What is the correct debit to the machinery account?
The machinery account should be debited with $44,000, being the price plus delivery and installation. These are directly attributable costs of bringing the asset into use, whereas the maintenance contract is a revenue expense charged to profit or loss.
- A$40,000
- B$44,000Correct
- C$47,000
- D$43,500
Explanation
Cost includes purchase price, delivery and installation: 40,000 + 1,500 + 2,500 = $44,000. The maintenance contract is a revenue expense, so $3,000 goes to the P&L. $47,000 wrongly includes maintenance; $43,500 omits installation and includes maintenance incorrectly, while $40,000 omits directly attributable costs.
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