Where an equipment purchase appears on the income statement
/When equipment is purchased, it is not initially reported on the income statement. Instead, it is reported on the balance sheet as an increase in the fixed assets line item. More specifically, it is initially recorded in the Equipment fixed assets account, which is then aggregated into the fixed assets line item on the balance sheet. In the reporting period in which the purchase was made, the transaction is also reported on the firm’s statement of cash flows, within the cash flows from investing activities section.
Once the company starts recognizing depreciation expense on the equipment, this amount appears in the income statement within the depreciation expense line item, and will continue to do so until the asset has been fully depreciated. In addition, if management ever considers the equipment’s value to be impaired, then the related impairment charge also appears on the income statement as an expense; this impairment may greatly reduce the carrying amount of the equipment asset, so that very little depreciation expense is subsequently charged against it.
Another possibility is that the company buys equipment with a cost that is below its capitalization limit. In this case, the full amount of the purchase is charged immediately to expense in the current period, so that it appears in the income statement right away.
A further impact of an equipment purchase is that the associated depreciation expense will reduce the amount of taxable income reported on the income statement. This impact depends on whether the applicable government entity accepts depreciation expense as a valid tax deduction, which is usually the case.
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Example of Equipment Purchase Appearing on Income Statement
Hammer Industries acquires a milling machine for $25,000, and expects to actively use it for the next five years, after which it will sell off the equipment for scrap. Using the straight-line method of depreciation, each annual income statement produced by Hammer will include a $5,000 depreciation charge. The company is subject to a 20% income tax, so the net impact of of the purchase is an annual $1,000 decline in its income tax expense.