Problem:
The invoice of a machine is $40,000. Various other costs relating to the acquistion and installation of the machine including transportation, electrical wiring, special base, and so on amount to $7,500. The machine has an estimated life of 10 yrs, with no residual value at the end of that period.
The owner of the business suggests that the incidental costs of $7,500 be charged to expense immediately for the following reasons:
1. If the machine should be sold, these costs can not be recovered in the sales price.
2. The inclusion of the $7,500 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
3. Charging the $7,500 to expense immediately will reduce federal income taxes.
Instructions:
Discuss each of the points made by the owner of the business.