QUESTIONS
1. What are the major characteristics of plant assets?
2. Mickelson Inc. owns land that it purchased on January 1, 2000, for $450,000. At December 31, 2017, its current value is $770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain.
3. 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.
4. Indicate where the following items would be shown on a balance sheet.
(a) A lien that was attached to the land when purchased.
(b) Landscaping costs.
(c) Attorney’s fees and recording fees related to purchasing land.
(d) Variable overhead related to construction of machinery.
(e) A parking lot servicing employees in the building.
(f) Cost of temporary building for workers during construction of building.
(g) Interest expense on bonds payable incurred during construction of a building.
(h) Assessments for sidewalks that are maintained by the city.
(i) The cost of demolishing an old building that was on the land when purchased.
5. 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?
6. The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.
(a) Organization and promotion expenses.
(b) Architect’s 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’s books and in its annual financial statements?
7. 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?
8. 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?
9. Provide examples of assets that do not qualify for interest capitalization.
10. What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?
11. How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?
12. Discuss the basic accounting problem that arises in handling each of the following situations.
(a) Assets purchased by issuance of common stock.
(b) Acquisition of plant assets by gift or donation.
(c) Purchase of a plant asset subject to a cash discount.
(d) Assets purchased on a long-term credit basis.
(e) A group of assets acquired for a lump sum.
(f) An asset traded in or exchanged for another asset.
13. Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation.
Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under long-term payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.
14. Schwartzkopf Co. purchased for $2,200,000 property that included both land and a building to be used in operations. The seller’s book value was $300,000 for the land and $900,000 for the building. By appraisal, the fair value was estimated to be $500,000 for the land and $2,000,000 for the building. At what amount should
Schwartzkopf report the land and the building at the end of the year?
15. Pueblo Co. acquires machinery by paying $10,000 cash and signing a $5,000, 2-year, zero-interest-bearing note payable. The note has a present value of $4,208, and
Pueblo purchased a similar machine last month for $13,500. At what cost should the new equipment be recorded?
16. Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.
17. Crowe Company purchased a heavy-duty truck on July
1, 2014, for $30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of $6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing $42,000; $16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance.
What is the entry to record the trade-in?
18. 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.
19. What accounting treatment is normally given to the following items in accounting for plant assets?
(a) Additions.
(b) Major repairs.
(c) Improvements and replacements.
20. New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month’s wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.
21. To what extent do you consider the following items to be proper costs of the fixed asset? Give reasons for your opinions.
(a) Overhead of a business that builds its own equipment.
(b) Cash discounts on purchases of equipment.
(c) Interest paid during construction of a building.
(d) Cost of a safety device installed on a machine.
(e) Freight on equipment returned before installation, for replacement by other equipment of greater capacity.
(f) Cost of moving machinery to a new location.
(g) Cost of plywood partitions erected as part of the remodeling of the office.
(h) Replastering of a section of the building.
(i) Cost of a new motor for one of the trucks.
22. Neville Enterprises has a number of fully depreciated assets that are still being used in the main operations of the business. Because the assets are fully depreciated, the president of the company decides not to show them on the balance sheet or disclose this information in the notes.
Evaluate this procedure.
23. What are the general rules for how gains or losses on retirement of plant assets should be reported in income?
