Onslow Company purchased a used machine as an investment. Under U.S. GAAP, how should Onslow initially record the cost of the machine on its balance sheet?

• A. At the lower of cost or market value
• B. At the machine's estimated fair market value only
• C. At the purchase price plus any costs necessary to get the machine ready for use
• D. At the purchase price minus any installation costs

Answer: (C)

Verified step by step guidance

1. Understand the concept of initial asset recognition under U.S. GAAP: When a company acquires an asset, it must record the asset at its historical cost, which includes the purchase price and any costs necessary to prepare the asset for its intended use.
2. Identify the components of the historical cost: These typically include the purchase price, transportation costs, installation costs, and any other costs directly attributable to bringing the asset to its operational condition.
3. Exclude costs that are not directly related to preparing the asset for use: For example, maintenance costs or costs incurred after the asset is operational are not included in the initial recognition.
4. Record the asset on the balance sheet: The total of the purchase price and all necessary preparation costs is recorded as the asset's value under the 'Property, Plant, and Equipment' section of the balance sheet.
5. Ensure compliance with U.S. GAAP: Verify that the recorded value aligns with the principle of historical cost and does not use market value or any other valuation method unless specified by accounting standards.