Daniel Manufacturing Limited (DML) purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000.\

Required:

For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses.

Answer:

Item	Include in cost of lathe	Expense	Justification
Lathe
3% discount
Freight in
Insurance
Voucher
Installation
Testing
Damages
Sales Tax
Shutdown
Total cost