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Chapter 10: 1BE (page 502)
Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.
$38,600 the prior
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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.
Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)42,000 to raze the old buildings and sold salvaged lumber and brick for \(6,300. Legal fees of \)1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost \(1,500, and a liability insurance premium paid during construction was \)900. The contractor’s charge for construction was \(2,740,000. The company paid the contractor in two installments: \)1,200,000 at the end of 3 months and \(1,540,000 upon completion. Interest costs of \)170,000 were incurred to finance the construction. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.
Question: (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.
Land | \(230,000 |
Buildings | 890,000 |
Leasehold improvements | 660,000 |
Equipment | 875,000 |
During 2017, the following transactions occurred.
Excavation fees | \(38,000 |
Architectural design fees | 11,000 |
Building permit fee | 2,500 |
Imputed interest on funds used during construction (stock financing) | 8,500 |
The building was completed and occupied on September 30, 2017.
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.
Johnson & Johnson, the world’s leading and most diversified healthcare corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.
1.Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets: Building and building equipment 20–40 years Land and leasehold improvements 10–20 years Machinery and equipment 2–13 years 4. Property, Plant and Equipment At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were: (dollars in millions) 2014 2013 Land and land improvements \( 833 \) 885 Buildings and building equipment 10,046 10,423 Machinery and equipment 22,206 22,527 Construction in progress 3,600 3,298 36,685 37,133 Less accumulated depreciation 20,559 20,423 \(16,126 \)16,710 The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was \(115 million, \)105 million and \(115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was \)2.5 billion, \(2.7 billion and \)2.5 billion, respectively. |
Johnson & Johnson provided the following selected information in its 2014 cash flow statement.
Johnson & Johnson 2014 Annual Report Consolidated Financial Statements (excerpts) Net cash flows from operating activities \(18,471 Cash flows from investing activities Additions to property, plant and equipment (3,714) Proceeds from the disposal of assets 4,631 Acquisitions, net of cash acquired (2,129) Purchases of investments (34,913) Sales of investments 24,119 Other (primarily intangibles) (299) Net cash used by investing activities (12,305) Cash flows from financing activities Dividends to shareholders (7,768) Repurchase of common stock (7,124) Proceeds from short-term debt 1,863 Retirement of short-term debt (1,267) Proceeds from long-term debt 2,098 Retirement of long-term debt (1,844) Proceeds from the exercise of stock options/excess tax benefits 1,782 Net cash used by financing activities (12,260) Effect of exchange rate changes on cash and cash equivalents (310) Increase in cash and cash equivalents (6,404) Cash and cash equivalents, beginning of year (Note 1) 20,927 Cash and cash equivalents, end of year (Note 1) \)14,523 Supplemental cash flow data Cash paid during the year for: Interest $ 603 Income taxes 3,536 |
Instructions
Question: 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.
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