Lesson 1

Question 1

What are the major characteristics of PPE?

Answer 1

1. They are acquired for use in operations and not for resale.
2. They are long-term in nature and usually depreciated.
3. They possess physical substance.

Question 2

Watauga Co. had the following events:
Purchase of equipment for $70,000
Sales tax on purchase $700
Cost of freight $800
Insurance on freight $150
Repairs for damage during installation $1300
Installation cost $1050
What is the cost of the equipment?

Answer 2

$72,700
The cost of a piece of equipment includes all expenditures incurred in acquiring the equipment and preparing it for use. The repair costs are expensed and not in the capitalized cost of the equipment.

Question 3

Cotton Hotel Corp. recently purchased Emporia Hotel and the land on which it is located with the plan to tear down the Emporia Hotel and build a new hotel on the site.
How should the cost of the Emporia Hotel be treated?

Answer 3

Capitalized as part of the cost of the land.
If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building.

Question 4

How are fences and parking lots reported on the balance sheet?

Answer 4

Land Improvements
Improvements with limited lives, such as driveways, walks, fences, and parking lost are classified on the BS as Land Improvements and depreciated over their estimated lives.

Question 5

Land was purchased to be used as the site for the construction of a plant. A building on the site was sold and removed by the buyer so that construction on the plant could begin.
How should the proceeds from the sale of the building be treated?

Answer 5

Deducted from the cost of the land
If a company purchases land with an old building on it, then the cost of demolition less its salvage value is a cost of getting the land ready for its intended use and relates to the land rather than to the new building. The process from the sale of the old building is deducted from the cost of land.

Question 6

Wilson Co. purchased land as a factory site for $1,350,000.
Wilson paid $120,000 to tear down two buildings on the land.
Salvage was sold for $8,100
Legal fees of $5,220 were paid for title investigation and making the purchase.
Architect’s fees were $46,800. Title insurance cost $3,600, and liability insurance during construction cost $3,900.
Excavation cost $15,660
The contract was paid $4,200,000
An assessment made by the city for pavement was $9,600.
At what cost should Wilson Co record the land?

Answer 6

$1,480,320
Removal of old buildings - clearing, grading, and filling - is a land cost because this activity is necessary to get the land in condition for its intended purpose. Architect fees, liability insurance, and excavation are included in the cost of the building. The cost of the land is calculated as $1,350,000 + 120,000 - $8,100 + $5,220 + $3,600 + $9,600 = $1,480,320

Question 7

Property, Plant, and Equipment

Answer 7

Assets that (1) are acquired for use in operations and not for resale, (2) are long-term in nature and usually subject to depreciation, and (3) possess physical substance.

Question 8

Historical Cost

Answer 8

The value of an asset measured by the cash or cash equivalent price of obtaining the asset and bringing it to the location and condition necessary for its intended use.

Question 9

Self-constructed Asset

Answer 9

Assets constructed by a company rather than purchased.