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. 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 tools expense $500, credit cash $500

(B) Debit fixed asset $500, credit tools expense $500

(C) Debit fixed asset $500, credit cash $500

(D) Debit fixed asset $1,000, cred it cash $1,000

(E) Debit tools expense $1,000, cred it cash $1,000

Answer: A. Debit tools expense $500, credit cash $500

This is the right entry since the purchase price of this tool stands at $500, which falls below threshold capitalizing limit as per company policy. Immediate expensing applies to capitalization-threshold purchases. Thus, this $500 tool purchase should be debited to tools expense and credited cash.

Capitalization is a form of asset treatment in which an expenditure is recorded on the balance sheet instead of expensing it immediately as part Depreciation over the useful life is applicable to capitalized assets. Because this purchase of a tool is below the capitalization threshold, it should be expensed directly rather than being considered as an asset.