Which of the following would be considered a sunk cost?

Which of the following would be considered a sunk cost?

a. purchase price of new equipment

b. equipment rental for the production area

c. net book value of equipment that has no market value

d. warehouse lease expense

Answer

General guidance

Concepts and reason
Sunk Cost: It is the cost which does not affect the investment decision. The sunk always occurs and it is not dependent on any event.

Fundamentals

Purchases: Purchase of goods can either be made in cash or on credit from the suppliers. In the case when the goods are purchased on Credit, the company is liable to make its payment at a future date. To record such a liability until the payment is made by the company to the creditor the company maintains an account known as Trade Payables or Accounts Payable.

Operating Expense: Expenses which are directly involved in production and incurred for the day to day business activity is called Operating expenses like Salaries, employee benefits, and transportation.

Expenses: It is the amount incurred by the organization to generate revenue. It is shown in the income statement as a debit side.

Assets: It can be defined as the resources owned by the organization which is capable of providing some future benefits. On the basis of duration of time assets are of two types which are 1. Current Assets and 2. Fixed Assets

Step-by-step

Step 1 of 2

Purchase price of equipment will affect the investment decision and thus it is not considered as the sunk cost.

The rentals for the equipment will affect the cash flows and thus it is not considered as a sunk cost.

The expenses paid for the warehouse will decrease the cash flows and thus it is not considered as the sunk cost.

Sunk cost is the cost which is already incurred and does not affect the investment decision of the entity.

The purchase of equipment will affect the cash balance of the company and the cost of equipment will also affect the investment decision regarding the project. Hence, the equipment cost is not considered as a sunk cost.

The lease rental and the warehouse expenses are the operating expenses of the entity and this will affect the cash flows of such entity. The change in cash flows will affect the investment decision and hence, it is not considered as a sunk cost.

Step 2 of 2

The net book value of equipment having no market value is considered as a sunk cost because it cannot be recovered.

The net book value of the equipment is considered as a sunk cost.


Sunk cost is the cost which is already incurred and does not affect the investment decision of the entity. Such cost cannot be recovered.

The net book value of equipment shows the book value of the equipment after deducting the accumulated depreciation. The net book value does not affect the cash flows of the entity. The market value of the equipment is nil and therefore no amount can be recovered from such equipment.

Hence, it is considered as a sunk cost.

Answer

The net book value of the equipment is considered as a sunk cost.

Hottest videos

Leave a Reply

Your email address will not be published.

Related Posts