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Chapter 10: Q2Q (page 530)

Question: Mickelson Inc. owns land that it purchased on January 1, 2000, for \(450,000. At December 31, 2017, its current value is \)770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain

Short Answer

Expert verified

Answer

Company reports the land at $450,000 in balance sheet of December 31, 2017.

Step by step solution

01

Concept of historical cost

Historical cost is the cost incurred by the company at the time of acquisition of the assets to bring the assets in the company. Historical cost includes all cost incurred to make the assets ready for use.

02

Valuation of land in balance sheet

Land asset valued at $450,000 in the balance sheet year ended on December 31, 2017. Company shows land under the property plant and equipment head of the balance sheet. Sometime, land also shown under the investment or inventory.

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Most popular questions from this chapter

To what extent do you consider the following items to be proper costs of the fixed asset? Give reasons for your opinions.

  1. Overhead of a business that builds its own equipment.
  2. Cash discounts on purchases of equipment.
  3. Interest paid during the construction of a building.
  4. Cost of a safety device installed on a machine.
  5. Freight on equipment returned before installation, for replacement by other equipment of greater capacity.
  6. Cost of moving machinery to a new location.
  7. Cost of plywood partitions erected as part of the remodeling of the office.
  8. Replastering of a section of the building.
  9. Cost of a new motor for one of the trucks.

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company鈥檚 stock price to go down.

Instructions

Answer the following questions.

  1. What stakeholder interests are in conflict?
  2. What ethical issues does Carter face?
  3. How should these costs be allocated?

(Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter

\(15,800

Cash paid

10,000

Cost of old melter (5-year life, \)700 salvage value)

11,200

Accumulated depreciation鈥攐ld melter (straight-line)

6,300

Secondhand fair value of old melter

5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange

  1. has commercial substance, and
  2. lacks commercial substance. Cannondale鈥檚 fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

Marshall Const.

Brigham Mfg. Co.

Fair value of old crane

\( 82,000

Fair value of new crane

\)200,000

Cash paid

118,000

Cash received

118,000

Instructions

  1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
  3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
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