Module 1 Flashcards
On February 1, 2020, Nelson Corporation purchased a parcel of land as a factory site for $320,000. An old building on the property was demolished, and construction began on a new building which was completed on November 1, 2020. Costs incurred during this period are listed below:
Demolition of old building $ 20,000
Architect’s fees $35,000
Legal fees for title investigation and purchase contract $5,000
Construction costs $1,390,000
(Salvaged materials resulting from demolition were sold for $10,000.)
How should Nelson record the costs of the land and building, respectively?
$335,000 and $1,425,000
Correct. Removal of old buildings is a land cost because this activity is necessary to get the land in condition for its intended purpose. The architect fees are included in the cost of the building. Therefore, the cost of the land is calculated as: $320,000 + $20,000 + $5,000 - $10,000 salvage = $335,000. The cost of the building is calculated as: $35,000 + $1,390,000 = $1,425,000.
Mendenhall Corporation constructed a building at a cost of $14,000,000.
Weighted-average accumulated expenditures were $5,600,000
Actual interest was $560,000
Avoidable interest was $280,000.
If the salvage value is $1,120,000, and the useful life is 40 years, what is the depreciation expense for the first full year using the straight-line method?
$329,000
Correct. The cost of the buidling includes the historical cost and the lower of the actual or avoidable interest less any salvage value. Therefore, the cost of the building is calculated as: $14,000,000 + $280,000 - $1,120,000 = $13,160,000. The straight-line depreciation expense is calculated as: $13,160,000 / 40 years = $329,000 per year.
Jamison Company purchased the assets of Booker Company at an auction for $5,600,000. An independent appraisal of the fair value of the assets is listed below:
Land $1,900,000
Building $2,800,000
Equipment $2,100,000
Trucks $3,400,000
Assuming that specific identification costs are impracticable and that Jamison allocates the purchase price on the basis of the relative fair values, what amount would be allocated to the trucks?
$1,866,667
Correct. When a purchase is made at a lump-sum price, the company allocates the cost based on the relative fair values of the assets. Therefore, the value allocated to the trucks is: $5,600,000 x [ $3,400,000 / ($1,900,000 + $2,800,000 + $2,100,000 + $3,400,000)] = $1,866,667.
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On September 10, 2020, Jenks Co. incurred the following costs for one of its printing presses:
Purchase of attachment $55,000
Installation of attachment $5,000
Replacement parts for renovation of press $18,000
Labor and overhead in connection with renovation of press $7,000
Neither the attachment nor the renovation increased the estimated useful life of the press. However, the renovation resulted in significantly increased productivity. What amount of the costs should be capitalized?
$85,000
Correct. If an improvement, or renovation, increases the the output or quality of an asset, all of the costs associated with the addition or improvement should be capitalized. Therefore, the costs that should be capitalized is: $55,000 + $5,000 + $18,000 + $7,000 = $85,000
Ecker Company purchased a new machine on May 1, 2012 for $528,000. At the time of acquisition, the machine was estimated to have a useful life of ten years and an estimated salvage value of $24,000. The company has recorded monthly depreciation using the straight-line method. On March 1, 2021, the machine was sold for $72,000.
What should be the loss recognized from the sale of the machine?
$10,800
Correct. Depreciable Basis = $528,000 less $24,000 (salvage value) = $504,000 Depreciation = $504,000 / 10 years = 50,400 / year = $4,200 / month depreciation. Book Basis = $528,000 - (4,200 x 106 months) = $82,800 Sales Price - Book Basis = Gain/Loss $72,000 - 82,800 = $10,800 Loss
