Per company policy, tools with a purchase price greater than $1,000 are capitalized. What’s the correct entry to record a tool purchase of $500?
A) Debit fixed assets $1000, Credit cash $1,000
B) Debt fixed asset $500, Credit tools expense $500
C) Debt fixed asset $500, Credit cash $500
D) Debt tools expense $1,000, Credit cash $1,000
E) Debt tools expense $500, Credit cash $500
Answer: E) Debt tools expense $500, Credit cash $500
Explanation:
Fixed assets capitalization guidelines, as per company policy, includes all tools individually purchased for more than a thousand bucks. Because of the purchase price value of this asset in this case is being $500 that is also lower than $1,000 therefore this asset should be treated as an expense item instead of a fixed asset.
The double-entry accounting entry to record the purchase of a tool for $500 would be:
Debit: Tools Expense $500 (entry to debit the cost of the tools as an expense)
Credit: Cash $500 (the refrigerator will be recorded with EFT)
The entry moves the amount into the tools expense account, which is included under the income statement expenses, simultaneously deducting the sum from the cash account which is its counterpart on the balance sheet asset column.
A reason behind why the tool in is question is to be expensed is that its expected useful life is less than the company’s capitalization threshold of one year (or the year’s end). The amount spent on it should be factored in as a yearly expenditure in the current time period as opposed to being depreciated over the tool’s useful life.