Explaining the Nature of a Long Lived Asset and Determining and Recording the Financial Statement Effects of Its Purchase On January 2, 2012, Cruz 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:
a. Invoice price of the machine, $85,000.
b. Freight paid by the vendor per sales agreement, $1,000.
c. Installation costs, $2,400 paid in cash.
d. Payment was made as follows:
On January 2:
¦The installation costs were paid in cash.
¦Cruz Company common stock, par $1; 2,000 shares (market value, $3.50 per share).
¦Note payable, $45,000; 11.5 percent due April 16, 2012 (principal plus interest).
¦Balance of invoice price to be paid in cash. The invoice allows for a 3 percent discount for cash paid by January 12. On January 15:
¦Cruz Company paid the balance due.
1. What are the classifications of long lived assets? Explain their differences.
2. Record the purchase on January 2 and the subsequent payment on January 15. Show computations.
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:
Date Assets = Liabilities + Stockholders’ Equity
4. Explain the basis you used for any questionable items.