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Chapter 10: 20Q (page 502)

New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month鈥檚 wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.

Short Answer

Expert verified

The company only capitalized on the cost that adds value to the machine. Treatment of the payment of extra month wages is not proper. The company should not capitalize on the payment as this cost did not add value to the machine.

Step by step solution

01

Wages

Wages are recorded as the expense in the books of accounts. Wages is payment made to the employees or labor against their services.

02

Treatment Cost and Payment to dismissed employees

The company only capitalizes on that cost that adds value to the machine. So, the payment of the employee who is dismissed after paying a certain sum of money did not add to the company's cost. But if these wages are paid to the addition or improvement in the machine, then it is added to the machine's cost.

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Most popular questions from this chapter

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

(Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.

Schedule of Property Dispositions

Cost

Accumulated Depreciation

Cash

Proceeds

Fair Value

Nature of Disposition

Land

\(40,000

鈥�

\)31,000

\(31,000

Condemnation

Building

15,000

鈥�

3,600

鈥�

Demolition

Warehouse

70,000

\)16,000

74,000

74,000

Destruction by fire

Machine

8,000

2,800

900

7,200

Trade-in

Furniture

10,000

7,850

鈥�

3,100

Contribution

Automobile

9,000

3,460

2,960

2,960

Sale

The following additional information is available.

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased for \(35,000.

Building: On April 2, land and building were purchased at a total cost of \)75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated \(16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of \)90,000.

Machine: On December 26, the machine was exchanged for another machine having a fair value of \(6,300 and cash of \)900 was received. (The exchange lacks commercial substance.)

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

Instructions

Indicate how these items would be reported on the income statement of Hollerith Co.

Question: Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney鈥檚 fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect鈥檚 fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation鈥檚 books and in its annual financial statements?

(Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde鈥檚 asset is referred to below as 鈥淎sset A,鈥� and Wiggins鈥� is referred to as 鈥淎sset B.鈥� The following facts pertain to these assets.

Asset A

Asset B

Original cost

\(96,000

\)110,000

Accumulated depreciation (to date of exchange)

40,000

47,000

Fair value at date of exchange

60,000

75,000

Cash paid by Hyde, Inc.

15,000

Cash received by Wiggins, Inc.

15,000

Instructions

  1. Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
  2. Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
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