(Disposition of Assets) On April 1, 2017, Gloria Estefan Company received a condemnation award of \(430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost \)60,000 and \(280,000, respectively, when they were acquired. At April 1, 2017, the accumulated depreciation relating to the building amounted to \)160,000. On August 1, 2017, Estafan purchased a piece of replacement property for cash. The new land cost \(90,000, and the new building cost \)400,000.

Instructions

Prepare the journal entries to record the transactions on April 1 and August 1, 2017.

Short Answer

Expert verified
  1. Gain on disposable of Plant and Assets is $250,000.
  2. The value of the Building is $400,000.

Step by step solution

01

Meaning of Depreciation

Depreciation can be stated as the decline in the value of an asset over a useful period. All assets depreciate over time, except for land, whose value increases with the passage of time. Among the various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

02

(a) Preparing journal entry for April 1

Date

Particular

Debit ($)

Credit ($)

April 1, 2017

Cash

430,000

Accumulated Depreciation-Buildings

160,000

Land

60,000

Building

280,000

Gain on Disposal of Plant Assets

250,000

Computation of gain on disposal of Plant Asset

Computation of gain

Cash received

$430,000

Book value of land $ 60,000

Book value of buildings 120,000

Book value of land and building

(180,000)

Gain on disposal

$250,000

03

(b) Preparing journal entry for August 1

Date

Particular

Debit ($)

Credit ($)

Aug. 1, 2017

Land

90,000

Buildings

400,000

Cash

490,000

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Most popular questions from this chapter

Question: (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% declining balance 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

  1. 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.
  2. 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.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson’s weighted-average accumulated expenditures for interest capitalization purposes.

(Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Assets 1 and 2: These assets were purchased as a lump sum for \(100,000 cash. The following information was gathered.

Description

Initial Cost on Seller’s Books

Depreciation to Date on Seller’s Books

Book Value on Seller’s Books

Appraised value

Machinery

\)100,000

\(50,000

\)50,000

\(90,000

Equipment

60,000

10,000

50,000

30,000

Asset 3: This machine was acquired by making a \)10,000 down payment and issuing a \(30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two \)15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for \(35,900.

Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.

Cost of machinery traded

\)100,000

Accumulated depreciation to date of sale

40,000

Fair value of machinery traded

80,000

Cash received

10,000

Fair value of machinery acquired

70,000

Asset 5: Equipment was acquired by issuing 100 shares of \(8 par value common stock. The stock had a market price of \)11 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of \(150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.

Date

Payment

2/1

\)120,000

6/1

360,000

9/1

480,000

11/1

100,000

To finance construction of the building, a \(600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had \)200,000 of other outstanding debt during the year at a borrowing rate of 8%.

Instructions

Record the acquisition of each of these assets.

Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.

(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,

and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) \((275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect’s fee on building 22,000

(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Instructions

Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be

reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Item Land Land Improvements Buildings Other Accounts

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