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Chapter 10: Q7Q (page 531)

Question: Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?

Short Answer

Expert verified

Answer

Land used for manufacturing plant reported as property, plant and equipment. Land purchase for resale in next year reported as investment.

Step by step solution

01

Land used as site of manufacturing plant

Land purchased for the purpose of use in the normal operations of the business is considered as the plant assets. Plant assets are shown in the balance sheet as property, plant and equipment. Land used as manufacturing plant site is consider as the use for normal operation of the business

02

Land for resale in the next period

Land use for the speculation purpose consider as the investment and shows as investment in the balance sheet.

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Most popular questions from this chapter

(Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan—12% interest, payable semiannually, issued December 31, 2016

\)2,000,000

Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2018

1,400,000

Long-term loan—11% interest, payable on January 1 of

each year. Principal payable on January 1, 2021

1,000,000

Instructions

(Carry all computations to two decimal places.)

(A) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of \(5,200,000, and the weighted-average amount of accumulated expenditures was \)3,600,000. Compute the avoidable interest on this project.

(B) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.

Cheng Company traded a used truck for a new truck. The used truck cost \(30,000 and has accumulated depreciation of \)27,000. The new truck is worth \(37,000. Cheng also made a cash payment of \)36,000. Prepare Cheng’s entry to record the exchange. (The exchange lacks commercial substance.)

(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

Purchase

Cash paid for equipment, including sales tax of \(5,000 \)105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during first year of operation 1,500

on this equipment

Special plumbing fixtures required for new equipment 8,000

Repair cost incurred in first year of operations related 1,300

to this equipment

Construction

Material and purchased parts (gross cost \(200,000;

failed to take 2% cash discount) \)200,000

Imputed interest on funds used during

construction (stock financing) 14,000

Labor costs 190,000

Allocated overhead costs (fixed—\(20,000;

variable—\)30,000) 50,000

Profit on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life

The invoice price of a machine is \(50,000. Various other costs relating to the acquisition and installation of the machine, including transportation, electrical wiring, special base, and so on amount to \)7,500. The machine has an estimated life of 10 years, with no salvage value at the end of that period.

The owner of the business suggests that the incidental costs of \(7,500 be charged to theexpense immediately for the following reasons.

  1. If the machine should be sold, these costs cannot be recovered in the sales price.
  2. The inclusion of the \)7,500 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
  3. Charging the $7,500 to expense immediately will reduce federal income taxes.

Instructions

Discuss each of the points raised by the owner of the business.
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