PROBLEMS
P10-1 (L01) EXCEL (Classification of Acquisition and Other Asset Costs) At December 31, 2016, certain accounts included in the property, plant, and equipment section of Reagan Company’s balance sheet had the following balances…
Instructions
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.
Land Leasehold Improvements
Buildings Equipment
Disregard the related accumulated depreciation accounts.
(b) List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan’s financial statements.
(AICPA adapted)
P10-2 (L01,6) (Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2016, had the following balances…
Instructions
(Round to the nearest dollar.)
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.
Land Buildings
Land Improvements Equipment
(Hint: Disregard the related accumulated depreciation accounts.)
(b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.
(AICPA adapted)
P10-3 (L01,2,4) (Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.
The Land and Buildings account reported the following items during 2018.
…
Instructions
(a) Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2018.
(b) Show the proper presentation of land, buildings, and depreciation on the balance sheet at December 31, 2018.
(AICPA adapted)
P10-4 (L01,4,6) GROUPWORK (Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.
…
Instructions
Indicate how these items would be reported on the income statement of Hollerith Co.
(AICPA adapted)
P10-5 (L01,3) EXCEL (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker’s commission of $36,000, legal fees of $6,000, and title guarantee insurance of $18,000. The closing statement indicated that the land value was $500,000 and the building value was $100,000. Shortly after acquisition, the building was razed at a cost of $54,000.
Blair entered into a $3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows.
Plans, specifications, and blueprints $21,000
Architects’ fees for design and supervision 82,000
The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% decliningbalance method.
To finance construction costs, Blair borrowed $3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of $300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair’s weighted-average amounts of accumulated building construction expenditures were as follows.
For the period March 1 to December 31, 2017 $1,300,000
For the period January 1 to September 30, 2018 1,900,000
Instructions
(a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
(b) Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.
(AICPA adapted)
P10-6 (L01,3) (Interest During Construction) Grieg Landscaping began construction of a new plant on December 1, 2017. On this date, the company purchased a parcel of land for $139,000 in cash. In addition, it paid $2,000 in surveying costs and $4,000 for a title insurance policy. An old dwelling on the premises was demolished at a cost of $3,000, with $1,000 being received from the sale of materials.
Architectural plans were also formalized on December 1, 2017, when the architect was paid $30,000. The necessary building permits costing $3,000 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December with payments made to the contractor in 2018 as follows…
Instructions
Compute the balance in each of the following accounts at December 31, 2017, and December 31, 2018. (Round amounts to the nearest dollar.)
(a) Land.
(b) Buildings.
(c) Interest Expense.
P10-7 (L03) GROUPWORK (Capitalization of Interest) Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2012. Laserwords’ original facility became obsolete by early
2017 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.
On June 1, 2017, Laserwords contracted with Black Construction to have a new building constructed for $4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below…
Construction was completed and the building was ready for occupancy on May 27, 2018. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year.
10%, 5-year note payable of $2,000,000, dated April 1, 2014, with interest payable annually on April 1.
12%, 10-year bond issue of $3,000,000 sold at par on June 30, 2010, with interest payable annually on June 30.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.
Instructions
(a) Compute the weighted-average accumulated expenditures on Laserwords’ new building during the capitalization period.
(b) Compute the avoidable interest on Laserwords’ new building. (Round to one decimal place.)
(c) Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2018.
(1) Identify the items relating to interest costs that must be disclosed in Laserwords’ financial statements.
(2) Compute the amount of each of the items that must be disclosed.
(CMA adapted)
P10-8 (L04) (Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.
1. Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.)
2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
3. Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield’s machine. (The exchange has commercial substance for both parties.)
In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine.
…
Instructions
For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.
P10-9 (L04) (Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde’s asset is referred to below as “Asset A,” and Wiggins’ is referred to as “Asset B.” The following facts pertain to these assets…
Instructions
(a) Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and
Wiggins, Inc. in accordance with generally accepted accounting principles.
(b) Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
P10-10 (L04) (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane that has a book value of $90,000 (original cost $140,000 less accumulated depreciation $50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham $165,000 to manufacture and is classified as inventory. The following information is also available…
Instructions
(a) Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing.
(b) Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
(c) Assuming the same facts as those in (a), except that the fair value of the old crane is $98,000 and the cash paid is $102,000, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing.
(d) Assuming the same facts as those in (b), except that the fair value of the old crane is $97,000 and the cash paid $103,000, prepare the journal entries on the books of (1) Marshall Construction and (2) Brigham Manufacturing.
P10-11 (L01,4) (Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath’s controller, review the following transactions.
Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a $28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of $425 and installation costs of $500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below…
Instructions
(a) Plant assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
(b) For each of the three transactions described above, determine the value at which Klamath Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
(c) The books of Klamath Company show the following additional transactions for the fiscal year ended May 31, 2018.
(1) Acquisition of a building for speculative purposes.
(2) Purchase of a 2-year insurance policy covering plant equipment.
(3) Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes.
For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.
(CMA adapted)
