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Chapter 10: Q3Q (page 530)

Question: Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets. (a) Land. (b) Machinery and equipment. (c) Buildings

Short Answer

Expert verified

Answer

  1. Land: purchase price, closing cost, improvement cost and other cost
  2. Equipment: Purchase price, installation, insurance, handling cost and freight.
  3. Building cost: Material, labor, overhead and professional fees.

Step by step solution

01

Acquisition cost of Land

Land includes the following costs:

  1. Purchase price of the land paid by the company.
  2. Closing cost like recoding cost, fees paid to attorney.
  3. Cost incurred by the company to made the land ready for use.
  4. Cost incurred on improvement of land.
02

Acquisition cost of machinery and equipment

Machinery and equipment include the following costs:

  1. Price paid to purchase the machinery and equipment.
  2. Cost incurred on the freight.
  3. Cost incurred on the insurance of the machinery and equipment in transit.
  4. Handling and installation cost of machinery and equipment.
03

Acquisition cost of Building

Buildings include the following costs:

  1. Construction cost of building which include the material, labor and overhead.
  2. Cost incurred on permits and pro

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Most popular questions from this chapter

Question: One financial accounting issue encountered when a company constructs its own plant is whether the interest cost on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?

Question: Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use: (a) It should be excluded completely. (b) It should be included at the same rate as is charged to normal operations.

What are the circumstances or rationale that support or deny the application of these methods?

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

(Accounting for Self-Constructed Assets) Troopers Medical Labs, Inc., began operations 5 years ago producing stetrics, a new type of instrument it hoped to sell to doctors, dentists, and hospitals. The demand for stetrics far exceeded initial expectations, and the company was unable to produce enough stetrics to meet demand.

The company was manufacturing its product on equipment that it built at the start of its operations. To meet demand, more efficient equipment was needed. The company decided to design and build the equipment, because the equipment currently available on the market was unsuitable for producing stetrics.

In 2017, a section of the plant was devoted to development of the new equipment and a special staff was hired. Within 6 months, a machine developed at a cost of \(714,000 increased production dramatically and reduced labor costs substantially. Elated by the success of the new machine, the company built three more machines of the same type at a cost of \)441,000 each.

Instructions

a. In general, what costs should be capitalized for self-constructed equipment?

b. Discuss the propriety of including in the capitalized cost of self-constructed assets:

(1) The increase in overhead caused by the self-construction of fixed assets.

(2) A proportionate share of overhead on the same basis as that applied to goods manufactured for sale.

c. Discuss the proper accounting treatment of the \(273,000 (\)714,000 鈭� $441,000) by which the cost of the first machine exceeded the cost of the subsequent machines. This additional cost should not be considered research and development costs.

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
  2. What are the objectives for capitalizing interest?
  3. Discuss which assets qualify for interest capitalization.
  4. Is there a limit to the amount of interest that may be capitalized in a period?
  5. If interest capitalization is allowed, what disclosures are required?
See all solutions

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