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Chapter 10: Q6Q (page 530)

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect鈥檚 fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation鈥檚 books and in its annual financial statements?

Short Answer

Expert verified

Answer

Agree with the architect fees and interest and taxes. Disagree with the promotion expenses and interest revenue on investment as these are recoded as the expense and revenue respectively

Step by step solution

01

Organization and promotion expenses

Disagree with organization and promotion expenses as this cost did not include in the cost of building this cost shown as the operating expense in the income statement of the company

02

Architect fees

Architect fees is the professional fess paid by the company to the architect. So, it is included in the cost of building. So, agree with the architect fees.

03

Interest and taxes paid during construction of building

Interest and taxes cost incurred for the construction of building is consider as the overhead costa and included in the building cost. So, also agree with interest and taxes paid for the construction of building.

04

Interest revenue on investment

Interest revenue generated from the investment held for the purpose of the building construction is not included in the cost building. As this cost is shown in the revenues head of the income statement. Disagree with the interest revenue from investment.

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Most popular questions from this chapter

Previn Brothers Inc. purchased land at a price of \(27,000. Closing costs were \)1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life

(Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.

  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres鈥檚 assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

350,000

Equipment

300,000

300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

2. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300


3. Kim Company purchased office equipment for \)20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.


5. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

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.

The invoice price of a machine is \(50,000. Various other costs relating to the acquisition and installation of the machine, including transportation, electrical wiring, special base, and so on amount to \)7,500. The machine has an estimated life of 10 years, with no salvage value at the end of that period.

The owner of the business suggests that the incidental costs of \(7,500 be charged to theexpense immediately for the following reasons.

  1. If the machine should be sold, these costs cannot be recovered in the sales price.
  2. The inclusion of the \)7,500 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
  3. Charging the $7,500 to expense immediately will reduce federal income taxes.

Instructions

Discuss each of the points raised by the owner of the business.
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