Chapter 8, Problem 8.1P

Explaining the Nature of a Long-Lived Asset and Determining and Recording the Financial Statement Effects of Its Purchase (AP8-1)

On January 2, Summers Company bought a machine for use in operations. The machine has an estimated useful life of eight years and an estimated residual value of $2,600. The company provided the following expenditures:

1. a. Invoice price of the machine. $85,000.
2. b. Freight paid by the vendor per sales agreement, $1,000.
3. c. Installation costs. $2,400 paid in cash.
4. d. Payment was made as follows:

On January 2:

• The installation costs were paid in cash.
• Summers Company common stock, par $1; 2,000 shares (market value. $3.50 per share).
• Note payable, $60,000; 11.5 percent (principal plus interest due April 1 of the current year).
• Balance of invoice price to be paid in cash by January 12.

On January 12:

• Summers Company paid the balance due.

Required:

1. 1. What are the classifications of long-lived assets? Explain their differences.
2. 2. Record the purchase on January 2 and the subsequent payment on January 12. Show computations.
3. 3. Indicate the accounts, amounts, and effects (+ for increase and − for decrease) of the purchase and subsequent cash payment on the accounting equation. Use the following structure:

   

4. 4. Explain the basis you used for any questionable items.