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Chapter 10: Q1E. (page 533)

(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

Short Answer

Expert verified

(c), (d), (h), (i), (k), (l), (m), and (o) items are shown in land. (j) and (n) items shown in land improvement. (b), (e), (f), (g) and (p) items shown in building. (a) item shown in other account as note payable.

Step by step solution

01

Definition of fixed assets

Fixed assets are those assets which are converted into cash after the period of the 12 months or after the completion of the operating cycle of the company.

02

Table showing the classification of the items

Item

Land

Land improvement

Building

Other account

(a)

Borrowed amount to pay contractor

-$275,000 (Notes payable)

(b)

Payment from note proceeds

$275,000

(c)

Fill and clearing cost

$8,000

(d)

Real estate taxes

$7,000

(e)

Premium on insurance

$6,000

(f)

Refund of insurance premium

-$1,000

(g)

Architect fees

$22,000

(h)

Real estate purchasing cost

$250,000

(i)

Commission fee

$9,000

(j)

Fence installation

$4,000

(k)

Building removing cost

$11,000

(l)

Salvage value of building

-$5,000

(m)

Interest paid

$13,000

(n)

Parking cost

$19,000

(o)

Trees cost

$14,000

(p)

Excavation cost

$3,000

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Most popular questions from this chapter

(Nonmonetary Exchanges) You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Client A

Client B

Original cost

\(100,000

\)150,000

Accumulated depreciation

40,000

80,000

Fair value

80,000

100,000

Cash received (paid)

(20,000)

20,000

Instructions

  1. Record the trade-in on Client A鈥檚 books assuming the exchange has commercial substance.
  2. Record the trade-in on Client A鈥檚 books assuming the exchange lacks commercial substance.
  3. Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
  4. Record the entry on Client B鈥檚 books assuming the exchange has commercial substance.
  5. Record the entry on Client B鈥檚 books assuming the exchange lacks commercial substance.
  6. Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.

Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker鈥檚 commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects鈥� fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair鈥檚 weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

  1. Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
  2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.

(Interest During Construction) Grieg Landscaping began construction of a new plant on December 1, 2017. On this date, the company purchased a parcel of land for \(139,000 in cash. In addition, it paid \)2,000 in surveying costs and \(4,000 for a title insurance policy. An old dwelling on the premises was demolished at a cost of \)3,000, with \(1,000 being received from the sale of materials.

Architectural plans were also formalized on December 1, 2017, when the architect was paid \)30,000. The necessary building permits costing \(3,000 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December with payments made to the contractor in 2018 as follows.

Date of Payment

Amount of Payment

March 1

\)240,000

May 1

330,000

July 1

60,000

The building was completed on July 1, 2018.

To finance construction of this plant, Grieg borrowed \(600,000 from the bank on December 1, 2017. Grieg had no other borrowings. The \)600,000 was a 10-year loan bearing interest at 8%.

Instructions

Compute the balance in each of the following accounts at December 31, 2017, and December 31, 2018. (Round amounts to the nearest dollar.)

  1. Land.
  2. Buildings.
  3. Interest Expense.

Question: Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.

Durler Company purchased equipment on January 2, 2013, for \(112,000. The equipment had an estimated useful life of 5 years with an estimated salvage value of \)12,000. Durler uses straight-line depreciation on all assets. On January 2, 2017, Durler exchanged this equipment plus \(12,000 in cash for newer equipment. The old equipment has a fair value of \)50,000.

Accounting

Prepare the journal entry to record the exchange on the books of Durler Company. Assume that the exchange has commercial substance.

Analysis

How will this exchange affect comparisons of the return on asset ratio for Durler in the year of the exchange compared to prior years?

Principles

How does the concept of commercial substance affect the accounting and analysis of this exchange?
See all solutions

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