PROBLEM 10-7

P10.7 Vidi Corporation, a private enterprise, made the following purchases related to its property, plant, and equipment during its
fiscal year ended December 31, 2023. The company uses the straight-line method of depreciation for all its capital assets.
Instructions
Prepare the journal entries to record the acquisitions and/or costs incurred in the above transactions. In the case of present value
calculations, use any of the three methods (PV tables, financial calculator, or Excel functions). Do not round intermediate
calculations for the percentage allocation between the assets but round final amounts to the nearest dollar.
If there are alternative methods to account for any of the transactions, indicate what the alternatives are and your reason for choosing
the method that you used.
(1) In early January, Vidi issued 140,000 common shares in exchange for property consisting of land and a warehouse. On
the date of acquisition, a reliable, independent appraiser estimated that the fair value of the land and warehouse was
$600,000 and $300,000, respectively. The seller had advertised a price of $900,000 or best offer for the land and warehouse
in a commercial retail magazine. Vidi paid a local real estate broker a finder’s fee of $35,000. (to complete this
transaction). The most recent sale of Vidi’s shares took place a month prior when 15,000 common shares were sold
for $9 per share.
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(a)
If takes $9/sh. = total 140,000 shares x $9 = $1,260,000 vs.
the fair value of the land and warehouse was $600,000 and $300,000=$900,000
The value per share is too much?
Most importantly, Vidi is a private company, whose shares are Not actively traded = Less reliable since the shares are not actively
traded)
FMV of shares= less reliable to allocate as cost of PP&E. If FMV of assets given up is not reliable, now
take FMV of assets received = $900K
FMV of assets received = the fair value of the land and warehouse was $600,000 and $300,000=$900,000 (1)

1. Land ($600,000 + 23,333) 623,333 (3)

Buildings ($300,000 + 11,667) 311,667
Common Shares* (from FMV of land & Bldg. 900,000
(623,333+311,667)
Cash (For Finder’s fee) 35,000

* The market value of the assets is the most clearly determined value of the shares issued in exchange.
Allocation of broker’s fee:
$600,000
$35,000 X = $23,333 Land (2)
$900,000

$300,000
$35,000 X = $11,667 Warehouse
$900,000
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2) On March 31, the company acquired equipment on credit. The terms were a $7,000 cash down payment plus payments of $5,000
on March 31 for each of the next two years. The implicit interest rate was 12%. The equipment’s list price was $17,000. Additional
costs that were incurred to install the equipment included $1,000 to tear down and replace a wall and $1,500 to rearrange existing
equipment to make room for the new equipment. An additional $500 was spent to repair the equipment after it was dropped during
installation.

2. Equipment* 17,950
Notes Payable** 8,450
Cash ($7,000 + $1,000 + $1,500) 9,500

*Asset cost = (Present value of the annuity + down payment) + Installation + Rearrangement
= $8,450 + $7,000 + $1,000 + $1,500
= $17,950 It is evident for FMV of assets (Notes & Cash) given up
**Present value of an annuity @ 12% for 2 yrs
=5,000 x [(1 – (1.12)-2) / 0.12 ] =5,000 x (0.2028/0.12) =5,000 x 1.69005 = $8,450.25

Unexpected loss/expense /accidental in nature

Maintenance and Repairs Expense 500

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 Cash 500

3) A new motor was purchased for $50,000 for a large grinding machine (original cost of the machine, $350,000; accumulated
depreciation at the replacement date, $100,000). The motor will not improve the quality or quantity of production; however, it will
extend the grinding machine’s useful life from the current 8 years to 10 years. (Ignore the IFRS requirement to estimate and remove
the cost of the old motor.)
3. Machinery* (can extend the useful life=long-term 50,000
benefits)
Cash 50,000
* The original cost of the old motor and the related accumulated depreciation should be removed from the accounts as the asset has
been retired and is no longer in use. As these amounts are not known, this entry cannot be included here.

4) The company purchased a small building in a nearby town for $125,000 to use as a display and sales location. The municipal tax
assessment indicated that the property was assessed for $95,000, which consists of $68,000 for the building and $27,000 for the
land. The building had been empty for six months and needed considerable maintenance work before it could be used. The
following costs were incurred in 2023 before the company moved into the building on September 30: former owner’s unpaid
property taxes on the property for the previous year, $900; current year’s (2023) taxes, $1,000; rehinging of roof, $2,200; cost of
hauling refuse out of the basement, $230; cost of spray-cleaning the outside walls and washing windows, $750; cost of painting
inside walls, $3,170; and incremental fire and liability insurance for 15 months starting September 30, $940.

4. Land 35,995
Buildings 97,005*
Current year tax* ($1,000 X 3/12) (property tax expense 250
AFTER Sept. 30th)
Prepaid Insurance (starting in Sept.) 940
Cash 134,190
*See Calculations Below: After date of purchase
Calculation of purchase cost of land and building:
Purchase price $125,000
Unpaid property taxes for previous year 900
Current year taxes until date of purchase
($1,000 X 9/12): from Jan. to Sept. 30th ($ spent up to the time ready for use) 750
Total cost $126,650
1. Get the correct total amounts; Separate $126,650 into Land & Bldg.
3. Add more costs to bldg. (if necessary)
4. Do J/E

$27,000
$126,650 X = $35,995 Land
$95,000
$68,000
$126,650 X = $90,655 Buildings
$95,000
Step 1: calculate TOTAL land & building
Step 2: allocation land & building by relative fair market value

*Calculation of cost of building: (make it READY FOR USE)

Building cost $90,655
Re shingling roof 2,200
Hauling refuse 230
Cleaning outside walls and windows 750
Painting inside walls 3,170
Total cost $ 97,005
Step 3: Add more building costs to make it “ready-for-use”
Note: IF there are extra costs on the LAND (e.g. re-paint for parking, installation for “reserve parking”, etc.
Should capitalize into: Land Improvement, subject to depreciation

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(5) The company repaired the plumbing system in its factory for $35,000. The original plumbing costs were not known.
5. Maintenance and Repairs Expense 35,000
Cash 35,000
(6) On June 30, the company replaced a freezer with a new one that cost $20,000 cash (fair value of $21,000 for the new freezer less
trade-in value of the old freezer). The cost of the old freezer was $15,000. At the beginning of the year, the company had
depreciated 60% of the old freezer; that is, 10% per year of use.
6. Depreciation Expense 750
Accumulated Depreciation
– Equipment 750
($15,000 X 10% X 6/12): fully calculate dep’n up to the
date of Changes (e.g. exchange, disposal, replacement)

June 30th
Equipment (New) = FMV given 21,000
Accumulated Depreciation
– Equipment ($15,000 X 60%) + $750 9,750
Equipment (Old) 15,000
Cash 20,000
Loss on Disposal of Equipment (plug) 4,250

(7) The company painted the factory exterior at a cost of $12,000.

7. Maintenance and Repairs Expense 12,000

Cash 12,000
(Except that if question states: better conditions, much better use…extra benefits=maybe capitalized)

The previous owner’s unpaid property taxes on the property for the previous year could also be included in the land
account only, rather than allocated between land and building since unpaid municipal taxes consist of a lien on the land
and not on the building.

The decision to capitalize or expense the amount depends on the interpretation of the nature of the repair of the
plumbing system. If it is considered to increase the future service potential of the building it would be treated as a
major overhaul. If it is considered to maintain the existing level of service of the building the amount would be
expensed. Additional information would be required.
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P10.11 (Parts A & B only)
Camco Manufacturers Inc., a publicly listed company, has two machines that are accounted for under the revaluation model.
Technology in Camco’s industry is fast-changing, causing the fair value of each machine to change significantly about every two
years. The following information is available:
Machine #1 Machine #2
Acquisition date Jan. 2, 2020 June 30, 2019
Original cos $440,000 $540,000
Original estimate of useful life 8 years 12 years
Original estimate of residual value –0– –0–
Pattern of depreciation Straight-line Straight-line
Fair value at Dec. 31, 2021 310,000 440,000
Balance in Machinery account after proportionate method revaluation on Dec. 31, 2021
413,333 555,789
Balance in Accumulated Depreciation account after proportionate method revaluation on Dec. 31, 2021
103,333 115,789
Prior year Revaluation Gain or Loss for Machine #1 and cumulative balance in Revaluation Surplus (OCI) for Machine #2 at Jan. 1, 2023.
(20,000) 12,500
Fair value at Dec. 31, 2023 230,000 328,000
Both machines were last revalued on December 31, 2021. Camco has a December 31 year end.

Instructions
(a) Prepare the journal entries required for 2023, using the asset adjustment method.
(b) Prepare the journal entries required for 2023, using the proportionate method. Do not round intermediate calculations but round final
amounts to the nearest dollar.

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 PROBLEM 10-11

(a) Asset Adjustment Method

December 31, 2020

Machine #1

Depreciation Expense............................................................................. 51,667

Accumulated Depreciation – Machinery (Machine #1)...........
51,667*
*$310,000 ÷ 6 remaining years

Accumulated Depreciation – Machinery (Machine #1)..........................

103,333
Machinery (Machine #1).......................................................... 103,333*
*$51,667 X 2 years

The Machinery (Machine #1) account balance is now $310,000 - $103,333 = $206,667, and the related Accumulated Depreciation
account is zero.

Machinery (Machine #1)......................................................................... 23,333

Revaluation Gain or Loss......................................................... 20,000*
Revaluation Surplus (OCI)....................................................... 3,333
*Recognized in income (up to the extent of revaluation loss previously recognized in income for the same asset). [Refer to part (c)
to see calculations]

The Machinery (Machine #1) account balance is now $206,667 + $23,333 = $230,000

Machine #2

Depreciation Expense............................................................................. 46,316

Accumulated Depreciation – Machinery (Machine #2)........... 46,316*
*$440,000 ÷ 9.5 years

Accumulated Depreciation – Machinery (Machine #2).......................... 92,632

Machinery (Machine #2).......................................................... 92,632*
*$46,316 X 2 years
The Machinery (Machine #2) account is now $440,000 - $92,632 = $347,368, and the related Accumulated Depreciation account is
zero.
Revaluation Surplus (OCI)..................................................................... 12,500*
Revaluation Gain or Loss ....................................................................... 6,868
Machinery (Machine #2).......................................................... 19,368
*Recognized in OCI (up to the extent of revaluation surplus previously recognized in OCI for the same asset). [Refer to part (c) to
see calculations]
The Machinery (Machine #2) account is now $347,368 - $19,368 = $328,000

(b) Proportionate Method

December 31, 2020
*$310,000 ÷ 6 years
Machine #1 Depreciation Expense 51,667

Accumulated Depreciation – Machinery (Machine #1).......................................... 51,667*

Proportional after
Before revaluation revaluation
Machine #1 $413,333 x 230/206.667 $460,000
Accumulated depreciation 206,667* x 230/206.667 230,000
Carrying amount $206,667 x 230/206.667 $230,000

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*[$103,333+ ($51,667 X 2)]

Machinery (Machine #1)......................................................................... 46,667

Revaluation Gain or Loss......................................................... 20,000
Revaluation Surplus (OCI)....................................................... 3,333
Accumulated Depreciation – Machinery (Machine #1) ..........
23,334
[Refer to part (c) to see calculations]

Machine #2
Depreciation Expense............................................................................................................ 46,316

Accumulated Depreciation – Machinery (Machine #2)..........................................

46,316*
*$440,000 ÷ 9.5 years

X 328,000 Proportional after

Before revaluation / 347,368 revaluation
Machine #1 $555,789 $524,800
Accumulated depreciation 208,421* 196,800
Carrying amount $347,368 $328,000
*$115,789 + $46,316 X 2
Accumulated Depreciation – Machinery (Machine #2)..........................
11,621
Revaluation Surplus (OCI)..................................................................... 12,500
Revaluation Gain or Loss ....................................................................... 6,868
Machinery (Machine #2) ......................................................... 30,989