Transfer Source Lines from CIP Assets to Capitalized Assets

Scenario

Acme Company purchases two heavy machines from Bosch Germany. These machines were imported as different parts and assembled at their factory location. Two construction-in-process (CIP) assets were created to track the cost of these assets during the installation period.

Acme Company installed the assets one by one. The company completed the installation of the first asset in January, 2013 and capitalized it. In February, 2013, the asset accountant found that the freight charge of USD $56,000 for transporting the machinery parts from the port to factory was fully included in the second machinery asset, which is currently being installed.

The asset accountant performs an expensed source line transfer from the CIP asset to the capitalized asset to move the part of the freight changes from the second machine to the first machine.

Transaction Details

Machine 1 contains ten source lines with various amounts. The total of the ten source lines is USD 1,200,000, capitalized.

Machine 2 contains eight source lines forming part of the CIP asset. The total of the eight source lines is USD 985,000. The source line for the freight is USD $56,000.

The freight source line is transferred from machine 2 to machine 1, for an amount of 28,000.

Because the parts imported for both the machines are the same, the freight charges incurred must be allocated equally between the two assets. Machine 1 was capitalized in the last period. Therefore, the depreciation for the freight charge included on the asset cost must be calculated from the last period. To achieve this the source line transfer transaction must be expensed and should not be amortized.

Results of Source Line Transfer

The cost of the capitalized asset after the source line transfer is as follows:

Amount	Machine 1	Machine 2
Current cost	1,200,000	985,000
Source line transferred out	28,000	None
Source line transferred in	None	-28,000
Total	1,228,000	957,000

The following accounting entry is generated for this transfer:

Account	DR	CR
Asset Cost Account	28,000	None
CIP Cost Account	None	28,000