Based on the company policy that all tools with a purchase price greater than $1,000 are capitalized, the correct entry to record the tool purchase of $500 would be E) Debt tools expense $500, Credit cash $500.
How is a capitalization recorded?
When a good is capitalized, it means that it is recorded as an asset in the balance sheet of a company.
The fact that the tool cost only $500 means that it will not be capitalized as it is less than $1,000.
This means that it will be treated as an expense.
When expenses are incurred, they are debited to the relevant expense account which will be Tools expense in this case. The cash account is credited to show that it is reducing.
The full question is:
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
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