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Chapter 10: 19Q (page 531)

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

Short Answer

Expert verified

Additions are capitalized in the asset cost. A major repair is treated as an addition, improvement, or replacement based on the nature of the repair. Improvement or replacement treatment is based on whether the carrying value is known or not.

Step by step solution

01

Treatment of Additions

The company uses it to capitalize on the cost of any addition to the plant assets. The company capitalizes on the cost because new assets are added by the company in the existing plant assets.

02

Treatment of major repairs

Treatment of major repair depends on the type of major repair. A major repair is treated as the addition, improvement, or replacement.

03

Treatment of improvement or replacement

Replacement adds the new assets or parts but the improvement did not add anything to the plant asset. If the carrying value of the old asset is known then the improvement or replacement cost is capitalized. If the carrying amount is unknown then following two situations determine the treatment of improvement or replacement:

(a) When the improvement or replacement increases the useful life of the asset then the cost of improvement or replacement is added to the accumulated depreciation account.

(b) When the improvement or replacement leads to an increase in efficiency of asset then the cost of improvement or replacement is capitalized.

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Most popular questions from this chapter

Question: Discuss the basic accounting problem that arises in handling each of the following situations. (a) Assets purchased by issuance of common stock. (b) Acquisition of plant assets by gift or donation. (c) Purchase of a plant asset subject to a cash discount. (d) Assets purchased on a long-term credit basis. (e) A group of assets acquired for a lump sum. (f) An asset traded in or exchanged for another asset.

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

(Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below.

  1. Truck #1 has a list price of \(15,000 and is acquired for a cash payment of \)13,900.
  2. Truck #2 has a list price of \(16,000 and is acquired for a down payment of \)2,000 cash and a zero-interest-bearing note with a face amount of \(14,000. The note is due April 1, 2018. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
  3. Truck #3 has a list price of \)16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost \(12,000 and is normally sold by Clarkson for \)15,200. Clarkson uses a perpetual inventory system.
  4. Truck #4 has a list price of \(14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of \)10 and a market price of $13 per share.

Instructions

Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.

Question: What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?

Question: Mickelson Inc. owns land that it purchased on January 1, 2000, for \(450,000. At December 31, 2017, its current value is \)770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain
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