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?

1. Break Down the Problem

The company policy states that tools with a purchase price greater than $1,000 must be capitalized. In this scenario, since the tool's purchase price is$500, we need to recognize that it does not meet the capitalizing threshold.

2. Relevant Concepts

• Capitalization: Recording an asset on the balance sheet instead of expensing it, which is appropriate when the asset value exceeds a certain threshold.
• Expense Recognition: Tools purchased below the capitalization threshold are typically recorded as an expense immediately.

3. Analysis and Detail

Given that the tool's cost is below the $1,000 threshold:

• The entry will reflect an immediate expense instead of a capital asset.

4. Verify and Summarize

Since $500 is less than$1,000, we record the purchase as an expense. This is consistent with the company's policy regarding capitalization thresholds.

Final Answer

To record the purchase of a tool for $500, the journal entry would be:

• Debit: Tool Expense $500
• Credit: Cash (or Accounts Payable) $500

This reflects the immediate expense recognition for tools costing less than $1,000.