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Chapter 10: Q14Q (page 531)

Question: Schwartzkopf Co. purchased for \(2,200,000 property that included both land and a building to be used in operations. The seller鈥檚 book value was \)300,000 for the land and \(900,000 for the building. By appraisal, the fair value was estimated to be \)500,000 for the land and $2,000,000 for the building. At what amount should Schwartzkopf report the land and the building at the end of the year?.

Short Answer

Expert verified

Answer

Land reported at $440,000 and building reported at $1,760,000.

Step by step solution

01

Cost of land

CostofLand=FairvalueofLandFairvalueofLand+FairvalueofBuilding脳PurchasePrice=$500,000$500,000+$2,000,000脳$2,200,000=$440,000

02

Cost of building

CostofBuilding=FairvalueofBuildingFairvalueofLand+FairvalueofBuilding脳PurchasePrice=$2,000,000$500,000+$2,000,000脳$2,200,000=$1,760,000

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Most popular questions from this chapter

(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

Purchase

Cash paid for equipment, including sales tax of \(5,000 \)105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during first year of operation 1,500

on this equipment

Special plumbing fixtures required for new equipment 8,000

Repair cost incurred in first year of operations related 1,300

to this equipment

Construction

Material and purchased parts (gross cost \(200,000;

failed to take 2% cash discount) \)200,000

Imputed interest on funds used during

construction (stock financing) 14,000

Labor costs 190,000

Allocated overhead costs (fixed鈥擻(20,000;

variable鈥擻)30,000) 50,000

Profit on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

Hanson Company (see BE10-2) borrowed \(1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, \)2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.

(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.

Navajo Corporation traded a used truck (cost \(20,000, accumulated depreciation \)18,000) for a small computer with a fair value of \(3,300. Navajo also paid \)500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Question: Provide examples of assets that do not qualify for interest capitalization
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