Chapter 10 Homework and Solutions

1. 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?

$
The cost of land to be recorded 38600
$27,000 + $1,400 + $10,200 = $38,600

2. Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to

Equinox Inc. The market rate of interest for obligations of this nature is 10%.

Prepare the journal entry to record the purchase of this truck. (Round answers to 0 decimal places,
e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do
not indent manually. If no entry is required, select "No Entry" for the account titles and
enter 0 for the amounts.)

Account Titles and

Debit Credit
Explanation

Trucks 54641

Discount on 25359

Notes Paya 80000

Trucks = ($80,000 x 0.68301) = $54,641

3. Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment
of $315,000. The estimated fair values of the assets are land $60,000, building $220,000, and
equipment $80,000. At what amounts should each of the three assets be recorded? (Round final
answers to 0 decimal places, e.g. 5,275.)

Recorded Amount
$
Land 52500
$
Building 192500
$
Equipment 70000
Cos
Fair Value % of Total Recorded Amount
t
Land $60,000 60.0/360.0 × $315,000 $52,500
Building 220,000 220.0/360.0 × $315,000 192,500
Equipment 80,000 80.0/360.0 × $315,000 70,000
$360,000 $315,000

4. 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.) (Credit
account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)

Account Titles and

Debit Credit
Explanation

Equipment 3300

Accumulate 18000

Trucks 20000

Cash 500

Gain on Dis 800

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

(a) $13,000 paid to rearrange and reinstall machinery. EAT_1361449610

No

(b) $200,000 paid for addition to building. EAT_1361449610

No

(c) $200 paid for tune-up and oil change on delivery truck. EAT_1361449610

Yes

(d) $7,000 paid to replace a wooden floor with a concrete floor. EAT_1361449610

No
(e) $2,000 paid for a major overhaul on a truck, which extends the useful life. EAT_1361449610

No

6. Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2011.
Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated
depreciation of $8,400 at December 31, 2014. The machinery is sold on September 1, 2015, for
$5,200.

Prepare journal entries to (a) update depreciation for 2015 and (b) record the sale. (Round
answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented
when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)

No. Account Titles and Explanation Debit Credit

(a) Depreciation E 1600

Accumulated D 1600

(b) Cash 5200

Accumulated D 10000

Loss on Dispo 4800

Machinery 20000

Depreciation Expense = ($2,400 × 8/12) $1,600

=
Accumulated Depreciation- ($8,400 + $10,00
=
Machinery $1,600) = 0
7. expenditures and receipts below are related to land, land improvements, and buildings acquired for
use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) $(275,000 )

(b) Payment for construction from note proceeds 275,000
(c) Cost of land fill and clearing 8,000
(d) Delinquent real estate taxes on property assumed by purchaser 7,000
(e) Premium on 6-month insurance policy during construction 6,000
(f) Refund of 1-month insurance premium because construction completed early (1,000 )
(g) Architect’s fee on building 22,000
(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) 250,000
(i) Commission fee paid to real estate agency 9,000
(j) Installation of fences around property 4,000
(k) Cost of razing and removing building 11,000
(l) Proceeds from salvage of demolished building (5,000 )
(m) Interest paid during construction on money borrowed for construction 13,000
(n) Cost of parking lots and driveways 19,000
(o) Cost of trees and shrubbery planted (permanent in nature) 14,000
(p) Excavation costs for new building 3,000

Identify each item by letter and list the items in columnar form, using the headings shown below.
(Enter negative amounts using either a negative sign preceding the number e.g. -45 or
parentheses e.g. (45).)

Item Accounts Amount

EAT_1361506431 $
Money borrowed to pay building contractor (signed a
(a)
note) (275000)
Other Accounts

EAT_1361506431
(b) Payment for construction from note proceeds 275000
Building

EAT_1361506431
(c) Cost of land fill and clearing 8000
Land

EAT_1361506431
Delinquent real estate taxes on property assumed
(d) 7000
by purchaser
Land

EAT_1361506431
Premium on 6-month insurance policy during
(e) 6000
construction
Building

EAT_1361506431
Refund of 1-month insurance premium because
(f) (1000)
construction completed early
Building

EAT_1361506431
(g) Architect’s fee on building 22000
Building

EAT_1361506431
Cost of real estate purchased as a plant site (land
(h) 250000
$200,000 and building $50,000)
Land

EAT_1361506431
(i) Commission fee paid to real estate agency 9000
Land

EAT_1361506431
(j) Installation of fences around property 4000
Land Improvements
(k) Cost of razing and removing building EAT_1361506431
11000

Land
 Land

EAT_1361506431
(l) Proceeds from salvage of demolished building (5000)
Land

EAT_1361506431
Interest paid during construction on money
(m) 13000
borrowed for construction
Building

EAT_1361506431
(n) Cost of parking lots and driveways 19000
Land Improvements

EAT_1361506431
Cost of trees and shrubbery planted (permanent in
(o) 14000
nature)
Land

EAT_1361506431 $
(p) Excavation costs for new building
3000
Building

8. Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to
customers, the company purchases four new trucks on April 1, 2014. The terms of acquisition for each
truck are described below.

1 Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.
.
2 Truck #2 has a list price of $16,000 and is acquired for a down payment of $2,000 cash and a zero-
. interest-bearing note with a face amount of $14,000. The note is due April 1, 2015. Clarkson would
normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an
incremental borrowing rate of 8%.
3 Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Clarkson
. carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for
$15,200. Clarkson uses a perpetual inventory system.
4 Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in
. Clarkson Corporation. The stock has a par value per share of $10 and a market price of $13 per
share.

Prepare the appropriate journal entries for the above transactions for Clarkson Corporation. (Round
present value factors to 5 decimal places, e.g. 0.52500 and final answers to 0 decimal
places, e.g. 5,275. Credit account titles are automatically indented when amount is
entered. Do not indent manually. If no entry is required, select "No Entry" for the account
titles and enter 0 for the amounts.)

Account Titles and

No. Debit Credit
Explanation

1. Trucks 13900

Cash 13900

2. Trucks 14727
 Discount on N 1273

Cash 2000

Notes Payable 14000

3. Trucks 15200

Cost of Goods 12000

Inventory 12000

Sales Revenu 15200

4. Trucks 13000

Common Stock 10000

Paid-in Capital 3000

2 Truck PV of $14,000 @ 10% for 1

=
. s year =

$14,000 × 0.90909 $12,727

=

$12,727 + $2,000 $14,727

=

4
Trucks = 1,000 shares × $13 = $13,000
.
$13,000 less $10,000 par value = $3,000

9. Worf Co. both purchases and constructs various equipment it uses in its operations. The following
items for two different types of equipment were recorded in random order during the calendar year
2014.

Purchase
Cash paid for equipment, including sales tax of $5,000 $105,000
Freight and insurance cost while in transit 2,000
Cost of moving equipment into place at factory 3,100
Wage cost for technicians to test equipment 4,000
Insurance premium paid during first year of operation on this equipment 1,500
Special plumbing fixtures required for new equipment 8,000
Repair cost incurred in first year of operations related to this equipment 1,300
Construction
Material and purchased parts (gross cost $200,000; failed to take 2% cash
$200,000
discount)
Imputed interest on funds used during construction (stock financing) 14,000
Labor costs 190,000
Allocated overhead costs (fixed-$20,000; variable-$30,000) 50,000
Profit on self-construction 30,000
Cost of installing equipment 4,400

Compute the total cost for each of these two pieces of equipment.

$
Purchase equipment 122100
$
Construction equipment 440400
Purchase
Cash paid for equipment, including sales tax of
$105,000
$5,000
Freight and insurance while in transit 2,000
Cost of moving equipment into place at factory 3,100
Wage cost for technicians to test equipment 4,000
Special plumbing fixtures required for new
8,000
equipment
Total cost $122,100

Construction
Material and purchased parts ($200,000 × 0.98) $196,000
Labor costs 190,000
Overhead costs 50,000
Cost of installing equipment 4,400
Total cost $440,400

10. Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures
related to Land, to Buildings, and to Machinery and Equipment.

Abstract company’s fee for title search $520

Architect’s fees 3,170
Cash paid for land and dilapidated building thereon 87,000
Removal of old building $20,000
Less: Salvage 5,500 14,500
Interest on short-term loans during construction 7,400
Excavation before construction for basement 19,000
Machinery purchased (subject to 2% cash discount, which was not taken).
55,000
Company uses net method to record discount.
Freight on machinery purchased 1,340
Storage charges on machinery, necessitated by noncompletion of
building when machinery was delivered 2,180
New building constructed (building construction took 6 months from
date of purchase of land and old building) 485,000
Assessment by city for drainage project 1,600
Hauling charges for delivery of machinery from storage to new building 620
Installation of machinery 2,000
Trees, shrubs, and other landscaping after completion of building
(permanent in nature) 5,400

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment.
Assume the benefits of capitalizing interest during construction exceed the cost of implementation.
(Please leave spaces blank if there is no answer. Do not enter zeros in those spaces.)

Machinery and
Land Buildings Equipment Other
$
$ $ $
Abstract company’s fee for title
520
search

3170
Architect’s fees

87000
Cash paid for land and old building

14500
Removal of old building
Interest on short-term loans during
7400
construction
Excavation before construction for
19000
basement
Machinery purchased (subject to 2%
cash discount, which was not taken).
Company uses net method to record
53900 1100
discount.

1340
Freight on machinery purchased
Storage charges on machinery,
necessitated by noncompletion of
building when machinery was
2180
delivered
New building constructed (building
construction took 6 months from
date of purchase of land and old
485000
building)
Assessment by city for drainage
1600
project
Hauling charges for delivery of
machinery from storage to new
620
building

2000
Installation of machinery
Trees, shrubs, and other landscaping
after completion of building
5400
(permanent in nature)
$ $ $
$
57240
109020 514570 3900
 Don't show me this message again for the assignment

11. Harrisburg Furniture Company started construction of a combination office and warehouse building
for its own use at an estimated cost of $5,000,000 on January 1, 2014. Harrisburg expected to
complete the building by December 31, 2014. Harrisburg has the following debt obligations
outstanding during the construction period.

Construction loan—12% interest, payable semiannually,

issued December 31, 2013 $2,000,000
Short-term loan—10% interest, payable monthly, and
principal payable at maturity on May 30, 2015 1,400,000
Long-term loan—11% interest, payable on January 1 of
each year; principal payable on January 1, 2018 1,000,000
a. Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as
planned at a total cost of $5,200,000, and the weighted average amount of accumulated expenditures
was $3,600,000. Compute the avoidable interest on this project. (Use interest rates rounded to 2
decimal places, e.g. 7.58% for computational purposes and round final answers to 0
decimal places, e.g. 5,275.)

Avoidabl $
e Interest 406720
Weighted-Average Interest Avoidable
Accumulated Expenditures × Rate = Interest
$2,000,000 12% $240,000
1,600,000 10.42% 166,720
$3,600,000 $406,720

Weighted-average interest rate

Principal Interest
computation
10% short-term loan $1,400,000 $140,000
11% long-term loan 1,000,000 110,000
$2,400,000 $250,000

Total Interest $250,000

= = 10.42%
Total Principal $2,400,000

b. Compute the depreciation expense for the year ended December 31, 2015. Harrisburg elected to
depreciate the building on a straight-line basis and determined that the asset has a useful life
of 30 years and a salvage value of $300,000. (Round answer to 0 decimal places, e.g. 5,275.)

Depreciation $
Expense 176891
Actual Interest
Construction loan $2,000,000 × 12% = $240,000
Short-term loan $1,400,000 × 10% = 140,000
Long-term loan $1,000,000 × 11% = 110,000
Total $490,000

Because avoidable interest is lower than actual interest, use avoidable interest.
Cost $5,200,000
Interest capitalized 406,720
Total cost $5,606,720

Depreciation $5,606,720 – $300,000

= = $176,891
Expense 30 years

12. Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000.
Presented below are three independent cases related to the equipment.

(a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are
2/10, n/30. Assume that equipment purchases are initially recorded gross.
(b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in
cash one month after the purchase. The old equipment could have been sold for $400 at the date
of trade. (The exchange has commercial substance.)
(c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of
purchase. The note was due in one year and was paid on time. Assume that the effective-interest
rate in the market was 9%.

Prepare the general journal entries required to record the acquisition and payment in each of the
independent cases above. (Round answers to 0 decimal places, e.g. 5,275. Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

No
Account Titles and Explanation Debit Credit
.

EAT_1362130406
(a) 10000
Equipment

EAT_1362130406

10000
Accounts Payable

(To record the puchase of equipment on account.)

EAT_1362130406

10000
Accounts Payable

EAT_1362130406

9800
Cash

EAT_1362130406

200
Equipment

(To record the payment on account.)

EAT_1361535697
(b) 9900
Equipment (New )
 EAT_1362129685

1600
Loss on Disposal of Equipment

EAT_1362129685
-
6000
Accumulated Depreciation Equipment

EAT_1362129685

9500
Accounts Payable

EAT_1362129685

8000
Equipment (Old)

(To record the puchase of equipment on account.)

EAT_1362129685

9500
Accounts Payable

EAT_1362129685

9500
Cash

(To record the payment on account.)

EAT_1362130158
(c) 9908
Equipment

EAT_1362130158

892
Discount on Notes Payable

EAT_1362130158

10800
Notes Payable

(To record the puchase of equipment with a note.)

EAT_1362130158

892
Interest Expense

EAT_1362130158

10800
Notes Payable

EAT_1362130158
892

Discount on Notes Payable

 Discount on Notes Payable

EAT_1362130158

10800
Cash

(To record the payment of the note.)

Exercise 10-11

(a) Equipment = ($10,000 × 0.02) = $200

Accumulated Depreciation-
(b) = ($8,000 – $2,000) = $6,000
Equipment

Cost $8,000
Less: Accumulated depreciation 6,000
Book value of equipment (old) 2,000
Less: Fair value of equipment (old) 400
Loss on disposal of equipment $1,600

Cost ($9,500 + $400) $9,900

(c) Equipment = ($10,800 × 0.91743) = $9,908

Discount on Notes
= ($10,800 – $9,908) = $892
Payable

13. Hayes Industries purchased the following assets and constructed a building as well. All this was
done during the current year.

Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following
information was gathered.

Initial Cost on Depreciation to Book Value on

Description Seller’s Books Date on Seller’s Books Seller’s Books Appraised Value
Machinery $100,000 $50,000 $50,000 $90,000
Equipment 60,000 10,000 50,000 30,000

Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-
year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the
end of the first and second years. It was estimated that the asset could have been purchased outright
for $35,900.

Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial
substance.)
Facts concerning the trade-in are as follows.

Cost of machinery traded $100,000

Accumulated depreciation to date of sale 40,000
Fair value of machinery traded 80,000
Cash received 10,000
Fair value of machinery acquired 70,000
Asset 5

Office equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a
market price of $11 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of
$150,000. Construction began on February 1 and was completed on November 1. The payments to the
contractor were as follows.

Date Payment
2/1 $120,000
6/1 360,000
9/1 480,000
11/1 100,000

To finance construction of the building, a $600,000, 12% construction loan was taken out on February
1. The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the
year at a borrowing rate of 8%.

Record the acquisition of each of these assets. (Credit account titles are automatically indented
when amount is entered. Do not indent manually. If no entry is required, select "No Entry"
for the account titles and enter 0 for the amounts.)

Account Titles and Explanation Debit Credit

Acquisition of Assets 1 and 2

Machinery 75000

Equipment 25000

Cash 100000

Acquisition of Asset 3

Machinery 35900

Discount on N 4100

Cash 10000

Notes Payable 30000

Acquisition of Asset 4

Machinery 52500

Accumulated D 40000

Cash 10000
 Machinery 100000

Gain on Dispo 2500

Acquisition of Asset 5

Equipment 1100

Common Stock 800

Paid-in Capital 300

(To record acquisition of Office Equipment)

Land 150000

Buildings 1111900

Interest Expen 51900

Cash 1210000

HAYES INDUSTRIES
Acquisition of Assets 1 and 2

Use appraised values to break-out the lump-sum purchase

Descriptio Appraisa
Percentage Lump-Sum Value on Books
n l
Machinery 90,000 90/120 100,000 75,000
Equipment 30,000 30/120 100,000 25,000
120,000

Acquisition of Asset 3

Use the cash price as a basis for recording the asset with a discount recorded on the note.

Discount on Notes Payable = ($40,000 – $35,900) = $4,100

Acquisition of Asset 4

Since the exchange lacks commercial substance, a gain will be recognized in the proportion
of cash received ($10,000/$80,000) times the $20,000 gain (FMV of $80,000 minus BV of
$60,000). The gain recognized will then be $2,500 with $17,500 of it being unrecognized
and used to reduce the basis of the asset acquired.

Machinery = ($70,000 – $17,500) = $52,500

Acquisition of Asset 5

In this case the Office Equipment should be placed on Hayes’s books at the fair market
value of the stock. The difference between the stock’s par value and its fair market value
should be credited to Paid-in Capital in Excess of Par.
Equipment = (100 × $11 per share) = $1,100
Common
= ($11 – $8) × 100 Shares. = $300
Stock

Construction of Building
Schedule of Weighted-Average Accumulated Expenditures
Current Year Weighted-Average
Capitalization Accumulated
Date Amount Period Expenditures
February 1 $150,000 9/12 $112,500
February 1 120,000 9/12 90,000
June 1 360,000 5/12 150,000
September 1 480,000 2/12 80,000
November 1 100,000 0/12 0
$1,210,000 $432,500

Note that the capitalization is only 9 months in this exercise.

Avoidable Interest

Weighted-Average
Accumulated
Expenditures Interest Rate Avoidable Interest
$432,500 × 12% = $51,900

The weighted expenditures are less than the amount of specific borrowing; the specific
borrowing rate is used.

Building
= ($1,060,000 + $51,900) = $1,111,900
Cost

14. Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its
accounting department. On the first day of work, the accountant was assigned to total a batch of
invoices with the use of an adding machine. Before long, the accountant, who had never before seen
such a machine, managed to break the machine. Busytown Corporation gave the machine plus $340 to
Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following
information about the machines.

Busytown Corp. Dick Tracy Co.

(Old Machine) (New Machine)
Machine cost $290 $270
Accumulated depreciation 140 –0–
Fair value 85 425

For each company, prepare the necessary journal entry to record the exchange. (The exchange has
commercial substance.) (Credit account titles are automatically indented when amount is
entered. Do not indent manually. If no entry is required, select "No Entry" for the account
titles and enter 0 for the amounts.)

Account Titles and Explanation Debit Credit

Busytown Corporation

Machinery 425
 Accumulated D 140

Loss on Dispo 65

Machinery 290

Cash 340

Dick Tracy Business Machine

Company

cash 340

inventory 85

cost of goods 270

Sales Revenu 425

inventory 270

Machinery = ($340 + $85) = $425

Computation of loss:
Book value of old machine ($290 – $140) $150
Less: Fair value of old machine 85
Loss on exchange $65

15. Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in
cash for similar equipment used in the operations of Tony LoBianco Company. The following
information pertains to the exchange.

Carlos Arruza Co. Tony LoBianco Co.

Equipment (cost) $28,000 $28,000

Accumulated depreciation 19,000 10,000
Fair value of equipment 12,500 15,500
Cash given up 3,000
a. Prepare the journal entries to record the exchange on the books of both companies. Assume that the
exchange lacks commercial substance. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)

No Account Titles and

Debit Credit
. Explanation
(a) Carlos Arruza Company:
 Equipment 12000

Accumulate 19000

Equipment 28000

Cash 3000

(b) Tony Lo Bianca Company:

Equipment 12500

Accumulate 10000

Cash 3000

Loss on Dis 2500

Equipment 28000

Valuation of equipment

Book value of equipment given

$9,000
up
Fair value of boot given up 3,000
New equipment $12,000

OR

Fair value received $15,500

Less: Gain deferred 3,500*
New equipment $12,000

* Fair value of old equipment $12,500

Less: Book value of old
(9,000)
equipment
Gain on disposal $3,500

Computation of loss:
Book value of old equipment $18,000
Less: Fair value of old
15,500
equipment
Loss on disposal of equipment $2,500

b. Prepare the journal entries to record the exchange on the books of both companies. Assume that the
exchange has commercial substance. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
No Account Titles and
Debit Credit
. Explanation
(a) Carlos Arruza Company

Equipment 15500

Accumulate 19000

Equipment 28000

Gain on Dis 3500

Cash 3000

(b) Tony LoBainco Company

Equipment 12500

Accumulate 10000

Cash 3000

Loss on Dis 2500

Equipment 28000

Cost of new equipment:

Cash paid $3,000
Fair value of old
12,500
equipment
Cost of new equipment $15,500

Computation of gain on disposal of equipment:

Fair value of old equipment $12,500
Book value of old equipment ($28,000 – $19,000) = 9,000
Gain on disposal of equipment $3,500

Cost of new
equipment:
Fair value of
$15,500
equipment
Less: Cash received 3,000
Cost of new equipment $12,500

Computation of loss on disposal of equipment:

Book value of old equipment ($28,000 – $10,000) $18,000
Less: Fair value of equipment (Old) 15,500
Loss on disposal of equipment $2,500

16. Plant assets often require expenditures subsequent to acquisition. It is important that they be
accounted for properly. Any errors will affect both the balance sheets and income statements for a
number of years.

For each of the following items, indicate whether the expenditure should be capitalized or expensed in
the period incurred.

Items
(a) Improvement. EAT_1361872871

Capitalized

(b) Replacement of a minor broken part on a machine. EAT_1361872871

Expensed

(c) Expenditure that increases the useful life of an existing asset. EAT_1361872871

Capitalized

(d) Expenditure that increases the efficiency and effectiveness of a productive EAT_1361872871
asset but does not increase its salvage value.

Capitalized

(e) Expenditure that increases the efficiency and effectiveness of a productive EAT_1361872871
asset and increases the asset’s salvage value.

Capitalized

(f) Expenditure that increases the quality of the output of the productive asset. EAT_1361872871

Capitalized

(g) Improvement to a machine that increased its fair market value and its EAT_1361872871
production capacity by 30% without extending the machine’s useful life.

Capitalized

(h) Ordinary repairs. EAT_1361872871

Expensed

17. At December 31, 2013, certain accounts included in the property, plant, and equipment section of
Reagan Company’s balance sheet had the following balances.

Land $230,000
Buildings 890,000
Leasehold improvements 660,000
Equipment 875,000
During 2014, the following transactions occurred.

1 Land site number 621 was acquired for $850,000. In addition, to acquire the land Reagan paid a
. $51,000 commission to a real estate agent. Costs of $35,000 were incurred to clear the land.
During the course of clearing the land, timber and gravel were recovered and sold for $13,000.
2 A second tract of land (site number 622) with a building was acquired for $420,000. The closing
. statement indicated that the land value was $300,000 and the building value was $120,000.
Shortly after acquisition, the building was demolished at a cost of $41,000. A new building was
constructed for $330,000 plus the following costs.

Excavation fees $38,000

Architectural design fees 11,000
Building permit fee 2,500
Imputed interest on funds used during construction (stock
8,500
financing)

The building was completed and occupied on September 30, 2014.

3 A third tract of land (site number 623) was acquired for $650,000 and was put on the market for
. resale.
4 During December 2014, costs of $89,000 were incurred to improve leased office space. The related
. lease will terminate on December 31, 2016, and is not expected to be renewed. (Hint: Leasehold
improvements should be handled in the same manner as land improvements.)
5 A group of new machines was purchased under a royalty agreement that provides for payment of
. royalties based on units of production for the machines. The invoice price of the machines was
$87,000, freight costs were $3,300, installation costs were $2,400, and royalty payments for 2014
were $17,500.

(a)

Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014.
Disregard the related accumulated depreciation accounts.

Balance at December 31,

2014
$
Land 1614000
$
Buildings 1271500

Leasehold $
improvements 749000
$
Equipment 967700

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REAGAN COMPANY
Analysis of Land Account
for 2014
Balance at January 1, 2014 $230,000
Land site number 621
Acquisition cost $850,000
Commission to real estate
51,000
agent
Clearing costs $35,000
Less: Amounts recovered 13,000 22,000
Total land site number 621 923,000

Land site number 622

Land value 300,000
Building value 120,000
Demolition cost 41,000
Total land site number 622 461,000
Balance at December 31, 2014 $1,614,000

REAGAN COMPANY
Analysis of Buildings Account
for 2014
Balance at January 1, 2014 $890,000
Cost of new building
constructed
on land site number 622
Construction costs $330,000
Excavation fees 38,000
Architectural design fees 11,000
Building permit fee 2,500 381,500
Balance at December 31, 2014 $1,271,500

REAGAN COMPANY
Analysis of Leasehold Improvements Account
for 2014
Balance at January 1, 2014 $660,000
Office space 89,000
Balance at December 31, 2014 $749,000

REAGAN COMPANY
Analysis of Equipment Account
for 2014
Balance at January 1, 2014 $875,000
Cost of the new equipment
acquired
Invoice price $87,000
Freight costs 3,300
Installation costs 2,400 92,700
Balance at December 31, 2014 $967,700

18. Spitfire Company was incorporated on January 2, 2015, but was unable to begin manufacturing
activities until July 1, 2015, because new factory facilities were not completed until that date.

The Land and Building account reported the following items during 2015.

January 31 Land and building $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-2015 at 1% 4,000
December 31, 2015 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, 2015.
.
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, 2015, to June 30, 2015.
.

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 2015-1% of asset value (1% of $400,000, or $4,000).

a. Prepare entries to reflect correct land, building, and depreciation accounts at December 31, 2015.
(Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select
"No Entry" for the account titles and enter 0 for the amounts.)

No
Account Titles and Explanation Debit Credit
.

EAT_1362379510
1. 188700
Land
 EAT_1362379510

136250
Buildings

EAT_1362379510

53800
Retained Earnings

EAT_1362379510

610
Organization Expense

EAT_1362379510

32100
Salaries and Wages Expense

EAT_1362379510

1520
Prepaid Insurance

EAT_1362379510

570
Insurance Expense

EAT_1362379510

399950
Land and Buildings

EAT_1362379510
-
13600
Paid-in Capital in Excess of Par Common Stock

EAT_1362379510
2. 4000
Land and Buildings

EAT_1362379510

2637
Depreciation Expense

EAT_1362379510
-
1363
Accumulated Depreciation Buildings

Insurance Expense = (6 months × $95) = $570

Prepaid Insurance = (16 months × $95) = $1,520
Common Stock = (800 shares × $17) = $13,600

Land
Amount Consists of:
Acquisition Cost ($80,000 + [800 × $117]) $173,600
Removal of Old Building 9,800
 Legal Fees (Examination of title) 1,300
Special Tax Assessment 4,000
Total $188,700

Buildings
Amount Consists of:
Legal Fees (Construction contract) $1,860
Construction Costs (First payment) 60,000
Construction Costs (Second payment) 40,000
Insurance (2 months) ([2,280 ÷ 24] = $95 × 2 = $190) 190
Plant Superintendent’s Salary 4,200
Construction Costs (Final payment) 30,000
Total $136,250

Depreciation
Depreciation taken $4,000
Depreciation that should be
= (1% × $136,250) (1,363)
taken
Depreciation adjustment $2,637

b. Show the proper presentation of land, building, and depreciation on the balance sheet at December
31, 2015. (Round answers to 0 decimal places, e.g. 5,275.)

Spitfire Company
Balance Sheet
December 31, 2015

EAT_1362379510 Property, Plant, and Equipment

EAT_1362379510 $

188700
Land

EAT_1362379510 $

136250
Buildings

:
EAT_1362379510 Less EAT_1362379510
-

Accumulated Depreciation Buildings 1363 134887

$
EAT_1362379510 Total Property, Plant and Equipment
323587