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Chapter 10: Q2P (page 541)

(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.

Short Answer

Expert verified

Answer

  1. Balance of accounts
  2. Land account $485,000
  3. Building account $1,655,000
  4. Land improvement account $235,000
  5. Equipment account $1,295,000
  6. The tract of land should be included in Lobo鈥檚 balance sheet. Land and building values were not used by Lobo as described in Mendota's books.

Step by step solution

01

Meaning of Acquisition of Cost

In accounting terms,acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

02

(a 1) Analysis of Land Account

LOBO CORPORATION

Analysis of Land Account

2017

Balance at January 1, 2017

$ 300,000

Plant facility acquired from Mendota

Company鈥攑ortion of fair value allocated

To land (Schedule 1)

185,000

Balance on December 31, 2017

$ 485,000

03

(a 2) Analysis of Building Account

LOBO CORPORATION

Analysis of Land Improvements Account

2017

Balance at January 1, 2017

$ 140,000

Parking lots, streets, and sidewalks

95,000

Balance on December 31, 2017

$ 235,000

04

(a 3) Analysis of Leasehold Improvement

LOBO CORPORATION

Analysis of Buildings Account

2017

Balance at January 1, 2017

$1,100,000

Plant facility acquired from Mendota

Company鈥攑ortion of fair value allocated

to building (Schedule 1)

555,000

Balance at December 31, 2017

$1,655,000

05

(a 4) Analysis of Equipment

LOBO CORPORATION

Analysis of Equipment Account

2017

Balance at January 1, 2017

$ 960,000

Cost of new equipment acquired

Invoice price $400,000

Freight and unloading costs 13,000

Sales taxes 20,000

Installation costs 26,000

459,000

1,419,000

Deduct the cost of equipment disposed of

Equipment scrapped June 30, 2017 $ 80,000

Equipment sold July 1, 2017 44,000

124,000

Balance on December 31, 2017

$1,295,000

Note:The accumulated depreciation account can be ignored for equipment sold and equipment scraped as part of the problem.

Preparation of Schedule 1


Computation of Fair Value of Plant Facility Acquired from Mendota Company and Allocation to Land and Building

20,000 shares of Lobo common stock at $37 quoted market price on the date of the exchange

$740,000


Allocation to land and building accounts in proportion to appraised values at the exchange date:

Amount

Percentage of total

Land

$230,000

25

Building

690,000

75

Total

$920,000

100

Calculation

Amount

Land

$185,000

Building


555,000

Total

$740,000

06

 Step 6: (b) Explaining the situation that was not used to determine the answer

The following items in the fact situation were not considered to derive the answer to (a) above:

  1. Lobo's balance statement should include the parcel of property, which was purchased for $150,000 as a prospective future development location.
  2. Land and building values were not used by Lobo as described in Mendota's books.
  3. The loss of $12,080 (Schedule 2) sustained on the dismantling of a machine on June 30, 2017, should be reflected in Lobo's income statement's other costs and losses section. The $67,920 in accumulated depreciation (Schedule 3) should be deducted from Lobo's balance sheet's Accumulated Depreciation鈥擡quipment Account.
  4. The $3,000 loss on equipment sale on July 1, 2017 (Schedule 4) should be reflected in Lobo's income statement's other costs and losses section. The $21,000 in accrued depreciation (Schedule 4) should be deducted from Lobo's balance sheet's Accumulated Depreciation鈥擡quipment Account.

Preparation of Schedule 2

Loss on Scrapping of Machine

June 30, 2017


Cost, January 1, 2009

$80,000

Less: Accumulated depreciation (double-declining-balance method, 10-year life) January 1, 2009, to June 30, 2017 (Schedule 3)

67,920

Asset book value June 30, 2017

$12,080

Loss on scrapping of machine

$12,080

Preparation of Schedule 3

Year

Book Value at Beginning of Year

Depreciation

Expense

Accumulated Depreciation

2009

$80,000

$16,000

$16,000

2010

64,000

12,800

28,800

2011

51,200

10,240

39,040

2012

40,960

8,192

47,232

2013

32,768

6,554

53,786

2014

26,214

5,243

59,029

2015

20,971

4,194

63,223

2016

16,777

3,355

66,578

2017(6 months)

$13,422

$1,342

$67,920

Preparation of Schedule 4

Loss on Sale of Machine

July 1, 2017


Cost, January 1, 2014

$44,000

Less: Depreciation (straight-line method, salvage value of $2,000, 7-year life) January 1, 2014, to July 1, 2014

21,000

Asset book value July 1, 2017

$23,000

Asset book value

$23,000

Less: Proceeds from the sale

20,000

Loss on sale

$ 3,000

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Most popular questions from this chapter

Question: Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?

What are the general rules for how gains or losses on retirement of plant assets should be reported in income?

(Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath鈥檚 controller, review the following transactions.

Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a \(28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of \)425 and installation costs of \(500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below.

Future value of \)1 for 4 periods

1.46

Future value of an ordinary annuity for 4 periods

4.64

Present value of \(1 for 4 periods

0.68

Present value of an ordinary annuity for 4 periods

3.17

Transaction 2: On December 1, 2017, Klamath Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to \)220,000 and included the assets listed below. Klamath Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.

Yakima Book Value

Fair Value

Inventory

\( 60,000

\) 50,000

Land

40,000

80,000

Buildings

70,000

120,000

\(170,000

\)250,000

During its fiscal year ended May 31, 2018, Klamath incurred \(8,000 for interest expense in connection with the financing of these assets.

Transaction 3: On March 1, 2018, Klamath Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Klamath intends to use the land for a parking lot. The trucks had a combined book value of \)35,000, as Klamath had recorded \(20,000 of accumulated depreciation against these assets. Klamath鈥檚 purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of \)46,000 at the time of the transaction. In addition to the trucks, Klamath Company paid $19,000 cash for the land.

Instructions

  1. Plant assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
  2. For each of the three transactions described above, determine the value at which Klamath Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
  3. The books of Klamath Company show the following additional transactions for the fiscal year ended May 31, 2018.
    1. Acquisition of a building for speculative purposes.
    2. Purchase of a 2-year insurance policy covering plant equipment.
    3. Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes.

For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.

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

(Analysis of Subsequent Expenditures) King Donovan 91影视 Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company鈥檚 plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.
See all solutions

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