Cost of Assets and the Effect on Depreciation Early in its first year of business, Toner Company, a fitness and training center, purchased new workout equipment. The acquisition included the following costs:

Purchase price .......$150,000

Tax .............15,000

Transportation ..........4,000

Setup* ...........25,000

Painting* ............3,000

*The equipment was adjusted to Toner’s specific needs and painted to match the other equipment in the gym. The bookkeeper recorded an asset, Equipment, $165,000 (purchase price and tax). The remaining costs were expensed for the year. Toner used straight-line depreciation. The equipment was expected to last ten years with zero salvage value.

Required

1. How much depreciation did Toner report on its income statement related to this equipment in Year 1? What is the correct amount of depreciation to report in Year 1?

2. Income is $100,000 before costs related to the equipment are reported. How much income will Toner report in Year 1? What amount of income should it report? You can ignore income tax.

3. Using the equipment as an example, explain the difference between a cost and an expense.