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CSEET · Fundamentals of Accounting · Accounting Process

On 1 April, Anil Enterprises bought a machine for Rs 3,00,000 on credit from Vikas Ltd. It paid Rs 10,000 as freight and Rs 15,000 as installation charges in cash. The journal entry to record the entire transaction would debit Machinery A/c with which amount, and credit which accounts?

Machinery A/c is debited Rs 3,25,000, with Vikas Ltd credited Rs 3,00,000 and Cash credited Rs 25,000. Freight and installation are costs of bringing the machine into use, so they are added to its cost rather than expensed.

  1. ARs 3,00,000; credit Vikas Ltd only
  2. BRs 3,25,000; credit Vikas Ltd Rs 3,00,000 and Cash Rs 25,000Correct
  3. CRs 3,25,000; credit Vikas Ltd Rs 3,25,000
  4. DRs 3,15,000; credit Vikas Ltd Rs 3,00,000 and Cash Rs 15,000

Explanation

Freight and installation are costs necessary to bring the machine to working condition, so they are capitalised: 3,00,000 + 10,000 + 15,000 = Rs 3,25,000. Vikas Ltd is credited for the credit price Rs 3,00,000 and Cash for Rs 25,000. Charging freight or installation to expenses would understate the asset.

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