Capitalizing Depreciation on Equipment

[leverage]

Dear all

I recently had an example of capitalizing depreciation on equipment into inventory. Can someone explain this process to me? Why would one capitalize depreciation on equipment into inventory?

Please also comment on the following debit & credits:

Inventory 100
A/D-equipment 100

Why would one credit A/D-equipment since this should be a contra asset account, which in order to equalize would have to be debited...

I am confused and looking forward for your help.

Thanks

 

[Steve-LevelUp]

I have never heard of this before. Inventory would never be depreciated in that sense as inventory is held for re-sale. However, if equipment is purchased, and rented out over time to generate revenue (eg, back hoe) then it would not be inventory, but equipment.

 

[Drmdcpa]

Section 263a of the US Internal Revenue Code requires moving manufacturing overhead costs including depreciation expense into inventory or costs of goods sold. There are certain exceptions for small manufacturers but they are quite low.

You do not credit a/d to capitalise overhead costs. You credit the respective expenses for example depreciation expense.

 

[leverage]

Thank you all for your replies. I have now print screened the original slide from my lesson. I am still not clear on this booking of one of my professor:

Inventory 100
A/D-equipment 100

Drmdcpa, are you sure on your answer?

 

[Drmdcpa]

I am sure you did not make it clear that you were a student working on classwork. One thing above anything that an accountant has to be is ethical.

 

[leverage]

I am sure you did not make it clear that you were a student working on classwork. One thing above anything that an accountant has to be is ethical.

Why should this be relevant to you or anyone else?

 

[Drmdcpa]

Please note that if you are looking for assistance with an exam-style question, you must attempt the question yourself before asking for help. You can then state the answer you have so far and explain which aspect you need help with. Anyone posting exam-style questions expecting the answer to be given to them will have their posts removed. Repeat offenders will be banned from the forum.

Do you understand what it is to be ethical? IMHO, it should be taught before any other accounting courses. In fact again IMHO it should be taught throughout grammar school. Then perhaps there would not be so much strife and dishonesty in this world.

 

[leverage]

Sorry, I didn't see that there is a seperate Student Category in this forum. No reason to be so harsh.

 

[Drmdcpa]

You were the harsh one. First by not being up front, honest and ethical. Second by stating it is nobody's concern that you are a student not being up front and being unethical