91Ó°ÊÓ

(Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.

The Land and Buildings account reported the following items during 2018.

January 31	Land and buildings	\(160,000
February 28	Cost of removal of building	9,800
May 1	Partial payment of new construction	60,000
May 1	Legal fees paid	3,770
June 1	Second payment on new construction	40,000
June 1	Insurance premium	2,280
June 1	Special tax assessment	4,000
June 30	General expenses	36,300
July 1	Final payment on new construction	30,000
December 31	Asset write-up	53,800
		399,950
December 31	Depreciation—2018 at 1%	(4,000)
December 31, 2018	Account balance	\)395,950

The following additional information is to be considered.

1. To acquire land and building, the company paid \(80,000 cash and 800 shares of its 8% cumulative preferred stock, par value \)100 per share. Fair value of the stock is \(117 per share.

2. Cost of removal of old buildings amounted to \)9,800, and the demolition company retained all materials of the building.

3. Legal fees covered the following.

Cost of organization	\( 610
Examination of title covering purchase of land	1,300
Legal work in connection with construction contract	1,860
	\)3,770

4. Insurance premium covered the building for a 2-year term beginning May 1, 2018.

5. The special tax assessment covered street improvements that are permanent in nature.

6. General expenses covered the following for the period from January 2, 2018, to June 30, 2018.

President’s salary	\(32,100
Plant superintendent’s salary—supervision of new building	4,200
	\)36,300

7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building \(53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8.Estimated life of building—50 years. Depreciation for 2018—1% of asset value (1% of \)400,000, or $4,000).

Instructions

1. Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2018.
2. Show the proper presentation of land, buildings, and depreciation on the balance sheet at December 31, 2018.

Step by step solution

01

Meaning of Acquisition Cost

Acquisition cost refers to the purchasing cost incurred to buy a particular asset or anything. This mainly covers three aspects: mergers, fixed assets, and client acquisition.

02

(a) Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
Dec 31, 2018	Land (Schedule A)	188,700
	Buildings (Schedule B)	136,250
	Insurance Expense	570
	Prepaid Insurance	1,520
	Organization Expense	610
	Retained Earnings	53,800
	Salaries and Wages Expense	32,100
	Land and Buildings		399,950
	Paid-in Capital in Excess of Par Common Stock		13,600

Working notes:

Calculation of Insurance expense

$\begin{array}{rcl}\mathit{I}\mathit{n}\mathit{s}\mathit{u}\mathit{r}\mathit{a}\mathit{n}\mathit{c}\mathit{e}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}& \mathbf{=}& \mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{}\mathit{i}\mathit{n}\mathbf{ }\mathbf{ }\mathit{m}\mathit{o}\mathit{n}\mathit{t}\mathit{h}\mathit{s}\mathbf{×}\mathit{P}\mathit{e}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ & \mathbf{=}& \mathbf{6}\mathbf{×}\frac{\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{280}}{\mathbf{24}}\\ & \mathbf{=}& \mathbf{6}\mathbf{×}\mathbf{\$}\mathbf{95}\\ & \mathbf{=}& \mathbf{\$}\mathbf{570}\\ & & \end{array}$

Calculation of Prepaid expense

$\begin{array}{rcl}\mathbf{\backslash }\mathit{P}\mathit{r}\mathit{e}\mathit{p}\mathit{a}\mathit{i}\mathit{d}\mathbf{}\mathit{I}\mathit{n}\mathit{s}\mathit{u}\mathit{r}\mathit{a}\mathit{n}\mathit{c}\mathit{e}& \mathbf{=}& \mathit{N}\mathit{u}\mathit{m}\mathit{b}\mathit{e}\mathit{r}\mathbf{}\mathit{i}\mathit{n}\mathbf{ }\mathbf{ }\mathit{m}\mathit{o}\mathit{n}\mathit{t}\mathit{h}\mathit{s}\mathbf{×}\mathit{P}\mathit{e}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ & \mathbf{=}& \mathbf{16}\mathbf{×}\mathbf{\$}\mathbf{95}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{520}\\ & & \end{array}$

Preparing Schedule A

Amount Consists of
Acquisition Cost	$173,600
Removal of Old Building	9,800
Legal Fees (Examination of the title)	1,300
Special Tax Assessment	4,000
Total	$188,700

Working Notes:

Determining the amount of acquisition cost

$\begin{array}{rcl}\mathit{A}\mathit{c}\mathit{q}\mathit{u}\mathit{i}\mathit{s}\mathit{i}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{c}\mathit{o}\mathit{s}\mathit{t}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{l}\mathit{a}\mathit{n}\mathit{d}\mathbf{}\mathit{a}\mathit{n}\mathit{d}\mathbf{}\mathit{b}\mathit{u}\mathit{i}\mathit{l}\mathit{d}\mathit{i}\mathit{n}\mathit{g}\mathbf{+}\left(Shares×Pervalueshare\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{80}\mathbf{,}\mathbf{000}\mathbf{+}\left(800×\$117\right)\\ & \mathbf{=}& \mathbf{\$}\mathbf{173}\mathbf{,}\mathbf{600}\\ & & \end{array}$

Preparing Schedule B

Amount Consists of
Legal Fees (Construction contract)	$ 1,860
Construction Costs (First payment)	60,000
Construction Costs (Second payment)	40,000
Insurance (2 months)	190
Plant Superintendent’s Salary	4,200
Construction Costs (Final payment)	30,000
Total	$136,250

Preparing journal entry for land and building

Date	Particular	Debit ($)	Credit ($)
	Land and Buildings	4,000
	Depreciation Expense		2,637
	Accumulated Depreciation Buildings		1,363

Preparing Schedule C

Depreciation taken	$ 4,000
Depreciation that should be taken	(1,363)
Depreciation adjustment	$ 2,637

Working notes:

Calculation of value of Depreciation

$\begin{array}{rcl}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{b}\mathit{u}\mathit{i}\mathit{l}\mathit{d}\mathit{i}\mathit{n}\mathit{g}\mathbf{×}\mathit{D}\mathit{e}\mathit{p}\mathit{r}\mathit{e}\mathit{c}\mathit{i}\mathit{a}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{}\mathit{c}\mathit{h}\mathit{a}\mathit{r}\mathit{g}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{250}\mathbf{×}\mathbf{1}\mathbf{\%}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{363}\\ & & \end{array}$

03

(b) Presentation of land, building, and depreciation on the balance sheet

Property, Plant, and Equipment:
Land	$188,700
Buildings $136,250
Less: Accumulated depreciation1,363	134,887
Total	$323,587

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