(Costs of Acquisition)

The invoice price of a machine is $50,000. Various other costs relating to the acquisition 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 years, with no salvage 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 cannot 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 raised by the owner of the business.

(AICPA adapted)