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Chapter 10: Q2Q (page 530)

Question: Mickelson Inc. owns land that it purchased on January 1, 2000, for \(450,000. At December 31, 2017, its current value is \)770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain

Short Answer

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Answer

Company reports the land at $450,000 in balance sheet of December 31, 2017.

Step by step solution

01

Concept of historical cost

Historical cost is the cost incurred by the company at the time of acquisition of the assets to bring the assets in the company. Historical cost includes all cost incurred to make the assets ready for use.

02

Valuation of land in balance sheet

Land asset valued at $450,000 in the balance sheet year ended on December 31, 2017. Company shows land under the property plant and equipment head of the balance sheet. Sometime, land also shown under the investment or inventory.

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Most popular questions from this chapter

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

Book value

\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

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.

Use the information for Navajo Corporation from BE10-8. Prepare the journal entry to record the exchange, assuming the exchange lacks commercial substance.

Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.
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