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Chapter 10: Q4Q (page 530)

Question: Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney’s fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.

Short Answer

Expert verified

Answer

Land: (a), (c), (h) and (i)

Land improvement: (b) and (e)

Building: (f) and (g)

Machinery: (d)

Step by step solution

01

Plant assets in balance sheet

Land, land improvement, building and machinery all are the part of the plant assets. In balance sheet these plant assets shown under the sub head tangible assets and head property plant and equipment of the assets.

02

Acquisition cost of machinery and equipment

S. No

Particulars

Part of balance sheet

(a)

Lien included in land

Land

(b)

Cost of landscaping

Land improvement or land depending upon life

(c)

Recoding fees and attorney fees

Land

(d)

Variable overhead incurred in machinery construction

Machinery

(e)

Parking lot for employees in building

Land improvement

(f)

Cost incurred on temporary building

Building

(g)

Interest paid on bonds incurred for building construction

Building

(h)

Sidewalk assessment

Land

(i)

Cost of destroying old building

Land

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Most popular questions from this chapter

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of \(315,000. The estimated fair values of the assets are land \)60,000, building \(220,000, and equipment \)80,000. At what amounts should each of the three assets be recorded?

(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: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?

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

  1. What was the cost of buildings and building equipment at the end of 2014?
  2. Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?
  3. What was the actual interest paid by the company in 2014? ‘
  4. What is Johnson & Johnson’s free cash flow? From the information provided, comment on Johnson & Johnson’s financial flexibility.

(Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.

The Land and Buildings account reported the following items during 2018.

January 31

Land and buildings

\(160,000

February 28

Cost of removal of building

9,800

May 1

Partial payment of new construction

60,000

May 1

Legal fees paid

3,770

June 1

Second payment on new construction

40,000

June 1

Insurance premium

2,280

June 1

Special tax assessment

4,000

June 30

General expenses

36,300

July 1

Final payment on new construction

30,000

December 31

Asset write-up

53,800

399,950

December 31

Depreciation—2018 at 1%

(4,000)

December 31, 2018

Account balance

\)395,950

The following additional information is to be considered.

1. To acquire land and building, the company paid \(80,000 cash and 800 shares of its 8% cumulative preferred stock, par value \)100 per share. Fair value of the stock is \(117 per share.

2. Cost of removal of old buildings amounted to \)9,800, and the demolition company retained all materials of the building.

3. Legal fees covered the following.

Cost of organization
\( 610
Examination of title covering purchase of land
1,300
Legal work in connection with construction contract
1,860

\)3,770

4. Insurance premium covered the building for a 2-year term beginning May 1, 2018.

5. The special tax assessment covered street improvements that are permanent in nature.

6. General expenses covered the following for the period from January 2, 2018, to June 30, 2018.

President’s salary
\(32,100
Plant superintendent’s salary—supervision of new building

4,200

\)36,300


7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building \(53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8.Estimated life of building—50 years. Depreciation for 2018—1% of asset value (1% of \)400,000, or $4,000).

Instructions

  1. Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2018.
  2. Show the proper presentation of land, buildings, and depreciation on the balance sheet at December 31, 2018.
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