CHAPTER 10
Acquisition and Disposition
of Property, Plant, and Equipment
SOLUTIONS TO B PROBLEMS
PROBLEM 10-1
(a) REAGAN COMPANY
Analysis of Land Account
for 2012
Balance at January 1, 2012 ……………….
Land site number 621
Acquisition cost ………………………………
$850,000
Commission to real estate agent ………
Clearing costs………………………………….
Less: Amounts recovered ……………….
22,000
Total land site number 621 ……..
Land site number 622
Land value ………………………………………
300,000
Building value ………………………………….
Demolition cost ……………………………….
41,000
Total land site number 622 ……..
REAGAN COMPANY
Analysis of Buildings Account
for 2012
Balance at January 1, 2012 ………………………
Cost of new building constructed
on land site number 622
PROBLEM 10-1 (Continued)
REAGAN COMPANY
Analysis of Leasehold Improvements Account
for 2012
REAGAN COMPANY
Analysis of Equipment Account
for 2012
Balance at January 1, 2012 ……………………………………….
$875,000
Invoice price …………………………………………………..
(b) Items in the fact situation which were not used to determine the
answer to (a) above are as follows:
1. Interest imputed on common stock financing is not permitted by
GAAP and thus does not appear in any financial statement.
Balance at January 1, 2012 ……………………………………….
$660,000
PROBLEM 10-2
(a) LOBO CORPORATION
Analysis of Land Account
2012
Balance at January 1, 2012 ………………………………………
$ 300,000
LOBO CORPORATION
Analysis of Land Improvements Account
2012
Balance at January 1, 2012 ………………………………………
$ 140,000
LOBO CORPORATION
Analysis of Buildings Account
2012
Balance at January 1, 2012 ………………………………………
$1,100,000
Plant facility acquired from Mendota
LOBO CORPORATION
Analysis of Equipment Account
2012
Balance at January 1, 2012 ………………………………………
$ 960,000
Cost of new equipment acquired
Invoice price ……………………………………………………
Freight and unloading costs …………………………..
Sales taxes ……………………………………………………..
Installation costs …………………………………………….
$1,419,000
PROBLEM 10-2 (Continued)
Plant facility acquired from Mendota
Deduct cost of equipment disposed of
Equipment scrapped June 30, 2012 …………………
$ 80,000*
Schedule 1
Computation of Fair Value of Plant Facility Acquired from
Mendota Company and Allocation to Land and Building
Allocation to land and building accounts in proportion
to appraised values at the exchange date:
Amount
Percentage
of total
Land
$230,000
25
Building
Total
Land
($740,000 X 25%)
Building
($740,000 X 75%)
Total
(b) Items in the fact situation that were not used to determine the answer
to (a) above, are as follows:
1. The tract of land, which was acquired for $150,000 as a potential
Equipment sold July 1, 2012 …………………………..
Balance at December 31, 2012 …………………………..
PROBLEM 10-2 (Continued)
3. The $12,080 loss (Schedule 2) incurred on the scrapping of a
machine on June 30, 2012, should be included in the other ex–
penses and losses section in Lobo’s income statement. The $67,920
Schedule 2
Loss on Scrapping of Machine
June 30, 2012
Cost, January 1, 2004 …………………………………………………………..
$80,000
Accumulated depreciation (double-declining-balance
PROBLEM 10-2 (Continued)
Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2012
(Double-declining-balance rate is 20%)
Year
Book Value
at Beginning
of Year
Depreciation
Expense
Accumulated
Depreciation
2004
$80,000
$16,000
$16,000
2005
64,000
12,800
28,800
Schedule 4
Loss on Sale of Machine
July 1, 2012
Cost, January 1, 2009 ……………………………………………………….
$44,000
Proceeds from sale ………………………………………………………….
Depreciation (straight-line method, salvage value
2006
2007
40,960
47,232
2008
32,768
53,786
2009
5,243
2010
20,971
63,223
2011
16,777
66,578
1,342
PROBLEM 10-3
(a)
1.
Land (Schedule A) …………………………..……………
188,700
Buildings (Schedule B) …………………………………
136,250
Insurance Expense (6 months X $95) …………….
570
Prepaid Insurance (16 months X $95) …………….
1,520
Schedule A
Amount Consists of:
Acquisition Cost
($80,000 + [800 X $117]) ……………………..
$173,600
Removal of Old Building ……………………….
Legal Fees (Examination of title) ……………
1,300
Special Tax Assessment ……………………….
4,000
Schedule B
Amount Consists of:
Legal Fees (Construction contract)………..
$ 1,860
Construction Costs (First payment) ……….
60,000
Construction Costs (Second payment) …..
Insurance (2 months)
([2,280 ÷ 24] = $95 X 2 = $190) ……………..
4,200
Construction Costs (Final payment) ………
30,000
2.
Land and Buildings ………………………………………
4,000
Depreciation Expense …………………………..
2,637
Accumulated Depreciation—Buildings …..
1,363
Organization Expense …………………………..………
Retained Earnings ………………………………………..
Salaries and Wages Expense ………………………..
Land and Buildings ………………………………
PROBLEM 10-3 (Continued)
Schedule C
Depreciation taken …………………………..
$ 4,000
PROBLEM 10-4
The following accounting treatment appears appropriate for these items:
Land—The loss on the condemnation of the land of $9,000 ($40,000 – $31,000)
should be reported as an extraordinary item on the income statement. If
Warehouse—The gain on the destruction of the warehouse should be reported
as an extraordinary item, assuming that it is unusual and infrequent. The
gain is computed as follows:
Insurance proceeds ………………………………..
$74,000
Deduct: Cost ………………………………………….
$70,000
Less: Accumulated depreciation …………
16,000
54,000
Realized gain ………………………………………….
$20,000
Some contend that a portion of this gain should be deferred because the
Machine—The recognized gain on the transaction would be computed as
follows:
Fair value of old machine …………………………
$7,200
Deduct: Book value of old machine
Cost …………………………………………………..
PROBLEM 10-4 (Continued)
This gain would probably be reported in other revenues and gains. It might
be reported as an unusual item if the company believes that such a situa–
tion occurs infrequently and if material. The cost of the new machine would
be capitalized at $4,550.
Fair value of new machine ………………………………………
$6,300
PROBLEM 10-5
(a) BLAIR CORPORATION
Cost of Land (Site #101)
As of September 30, 2013
Cost of land and old building ………………………………..
$500,000
(b) BLAIR CORPORATION
Cost of Building
As of September 30, 2013
Fixed construction contract price ………………………….
$3,000,000
Plans, specifications, and blueprints ……………………..
Interest capitalized during 2012 (Schedule 1) …………
Interest capitalized during 2013 (Schedule 2) …………
Cost of building ……………………………………………….
Schedule 1
Interest Capitalized During 2012 and 2013
Weighted-average
accumulated construction
expenditures
X
Interest rate
=
Interest to be
capitalized
2012:
$1,300,000
X
10%
=
$130,000*
X
=
Legal fees …………………………………………………………….
Title insurance ……………………………………………………..
Removal of old building ………………………………………..