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Chapter 10: Q05E (page 534)

(Treatment of Various Costs) Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company鈥檚 fee for title search

\( 520

Architect鈥檚 fees

3,170

Cash paid for land and dilapidated building thereon

87,000

Removal of old building \)20,000

Less: Salvage 5,500

14,500

Interest on short-term loans during construction

7,400

Excavation before construction for basement

19,000

Machinery purchased (subject to 2% cash

discount, which was not taken)

55,000

Freight on machinery purchased

1,340

Storage charges on machinery, necessitated

by noncompletion of building when

machinery was delivered

2,180

New building constructed (building

construction took 6 months from date

of purchase of land and old building)

485,000

Assessment by city for drainage project

1,600

Hauling charges for delivery of machinery

from storage to new building

620

Installation of machinery

2,000

Trees, shrubs, and other landscaping

after completion of building

5,400

Instructions

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.

Short Answer

Expert verified

Total Land cost =role="math" localid="1656077250168" $109,020

Total Building cost =$514,570

Step by step solution

01

Meaning of Fixed Asset

In accounting terms, a fixed asset is a tangible asset that is used for more than one year. All fixed assets except land have a tendency of depreciation on account of obsolescence; and the depreciation expense is charged to the books of accounts every year.

02

Determining the amount that should be debited to Land, Buildings, and to Machinery and Equipment

Land

Buildings

M & E

Other

Abstract fees

$ 520

Architect鈥檚 fees

Cash paid for land and old building

87,000

Removal of the old building

($20,000 鈥� $5,500)

14,500

Interest on loans during construction

7,400

Excavation before construction

19,000

Machinery purchased

$53,900

$1,100

Freight on machinery

1,340

Storage charges caused by non-completion of building

2,180

New building

485,000

Assessment by city

1,600

Hauling charges-machinery

620

Installation-machinery

2,000

Landscaping

5,400

$109,020

$514,570

$57,240

$3,900

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Most popular questions from this chapter

Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)42,000 to raze the old buildings and sold salvaged lumber and brick for \(6,300. Legal fees of \)1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost \(1,500, and a liability insurance premium paid during construction was \)900. The contractor鈥檚 charge for construction was \(2,740,000. The company paid the contractor in two installments: \)1,200,000 at the end of 3 months and \(1,540,000 upon completion. Interest costs of \)170,000 were incurred to finance the construction. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.

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.

Question: (Classification of Acquisition and Other Asset Costs) At December 31, 2016, certain accounts included in the property, plant, and equipment section of Reagan Company鈥檚 balance sheet had the following balances.

Land

\(230,000

Buildings

890,000

Leasehold improvements

660,000

Equipment

875,000

During 2017, the following transactions occurred.

  1. Land site number 621 was acquired for \)850,000. In addition, to acquire the land Reagan paid a \(51,000 commission to a real estate agent. Costs of \)35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for \(13,000.
  2. A second tract of land (site number 622) with a building was acquired for \)420,000. The closing statement indicated that the land value was \(300,000 and the building value was \)120,000. Shortly after acquisition, the building was demolished at a cost of \(41,000. A new building was constructed for \)330,000 plus the following costs.

Excavation fees

\(38,000

Architectural design fees

11,000

Building permit fee

2,500

Imputed interest on funds used

during construction (stock financing)

8,500

The building was completed and occupied on September 30, 2017.

  1. A third tract of land (site number 623) was acquired for \)650,000 and was put on the market for resale.
  2. During December 2017, costs of \(89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2019, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)
  3. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was \)87,000, freight costs were \(3,300, installation costs were \)2,400, and royalty payments for 2017 were $17,500.

Instructions

a, Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Leasehold Improvements

Buildings Equipment

Disregard the related accumulated depreciation accounts.

b, List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan鈥檚 financial statements.

(Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation鈥檚 balance sheet at December 31, 2016, had the following balances.

Land

\( 300,000

Land improvements

140,000

Buildings

1,100,000

Equipment

960,000

During 2017, the following transactions occurred.

  1. A tract of land was acquired for \)150,000 as a potential future building site.
  2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo鈥檚 common stock. On the acquisition date, Lobo鈥檚 stock had a closing market price of \(37 per share on a national stock exchange. The plant facility was carried on Mendota鈥檚 books at \)110,000 for land and \(320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are \)230,000 and \(690,000.
  3. Items of machinery and equipment were purchased at a total cost of \)400,000. Additional costs were incurred as follows.

Freight and unloading

\(13,000

Sales taxes

20,000

Installation

26,000

  1. Expenditures totaling \)95,000 were made for new parking lots, streets, and sidewalks at the corporation鈥檚 various plant locations. These expenditures had an estimated useful life of 15 years.
  2. A machine costing \(80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has been recorded on the basis of a 10-year life.
  3. A machine was sold for \)20,000 on July 1, 2017. Original cost of the machine was \(44,000 on January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of \)2,000.

Instructions

(Round to the nearest dollar.)

a. Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Buildings

Land Improvements Equipment

(Hint: Disregard the related accumulated depreciation accounts.)

b. List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo鈥檚 financial statements.

(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,

and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) \((275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect鈥檚 fee on building 22,000

(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Instructions

Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be

reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Item Land Land Improvements Buildings Other Accounts
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