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Chapter 10: Q7Q (page 531)

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?

Short Answer

Expert verified

Answer

Land used for manufacturing plant reported as property, plant and equipment. Land purchase for resale in next year reported as investment.

Step by step solution

01

Land used as site of manufacturing plant

Land purchased for the purpose of use in the normal operations of the business is considered as the plant assets. Plant assets are shown in the balance sheet as property, plant and equipment. Land used as manufacturing plant site is consider as the use for normal operation of the business

02

Land for resale in the next period

Land use for the speculation purpose consider as the investment and shows as investment in the balance sheet.

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Most popular questions from this chapter

Navajo Corporation traded a used truck (cost \(20,000, accumulated depreciation \)18,000) for a small computer with a fair value of \(3,300. Navajo also paid \)500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

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\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

Cheng Company traded a used truck for a new truck. The used truck cost \(30,000 and has accumulated depreciation of \)27,000. The new truck is worth \(37,000. Cheng also made a cash payment of \)36,000. Prepare Cheng鈥檚 entry to record the exchange. (The exchange lacks commercial substance.)

(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.

Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.
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