Question

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.

1. Land site number 621 was acquired for \)850,000. In addition, to acquire the land Reagan paid a \(51,000 commission to a real estate agent. Costs of \)35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for \(13,000.
2. A second tract of land (site number 622) with a building was acquired for \)420,000. The closing statement indicated that the land value was \(300,000 and the building value was \)120,000. Shortly after acquisition, the building was demolished at a cost of \(41,000. A new building was constructed for \)330,000 plus the following costs.

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.

1. A third tract of land (site number 623) was acquired for \)650,000 and was put on the market for resale.
2. During December 2017, costs of \(89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2019, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)
3. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was \)87,000, freight costs were \(3,300, installation costs were \)2,400, and royalty payments for 2017 were $17,500.

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.

Short answer

Answer

1. Balance of accounts
2. Land account $1,614,000
3. Building account $1,271,500
4. Leasehold improvement account $749,000
5. Equipment account $967,700
6. Imputing interest is prohibited by GAAP. The financial statement should list land number 623, which he purchased for $650,000, as land held for resale (investment section). Reagan's income statement should show $17,500 in royalty payments as a typical operational expenditure..

Step-by-step solution

Meaning of Acquisition of cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

(a 1) Analysis of land account

REAGAN COMPANY Analysis of Land Account for 2017
Balance at January 1, 2017	$ 230,000
Land site number 621
Acquisition cost $850,000
Commission to real estate agent 51,000
Clearing costs $35,000
Less: Amounts recovered 13,000 22,000	923,000
Total land site number 621
Land site number 622
Land value 300,000
Building value 120,000
Demolition cost 41,000
Total land site number 622	461,000
Balance on December 31, 2017	$1,614,000

(a 2) Analysis of Building account

REAGAN COMPANY Analysis of Buildings Account for 2017
Balance at January 1, 2017	$ 890,000
Cost of a new building constructed on land site number 622
Construction costs $330,000
Excavation fees 38,000
Architectural design fees are 11,000
Building permit fee 2,500	381,500
Balance on December 31, 2017	$1,271,500

(a 3) Analysis of Leasehold Improvement

REAGAN COMPANY Analysis of Leasehold Improvements Account for 2017
Balance at January 1, 2017	$660,000
Office space	89,000
Balance on December 31, 2017	$749,000

(a 4) Analysis of Equipment

REAGAN COMPANY Analysis of Equipment Account for 2017
Balance at January 1, 2017	$875,000
Cost of the new equipment acquired
Invoice price $ 87,000
Freight costs 3,300
Installation costs 2,400	92,700
Balance at December 31, 2017	$967,700

(b) Explaining the items in the fact situation that was not used to determine the answer

The following items in the fact situation were not considered to derive the answer to (a) above:

1. GAAP prohibits the imputing of interest on equity financing, so it does not appear in financial statements.
2. The company financial statement should list land site 623, which he purchased for $650,000, as land held for resale (investment section).
3. Reagan's income statement should show $17,500 in royalty payments as a typical operational expenditure.