Question

(Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2016, had the following balances.

Land	\( 300,000
Land improvements	140,000
Buildings	1,100,000
Equipment	960,000

During 2017, the following transactions occurred.

1. A tract of land was acquired for \)150,000 as a potential future building site.
2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of \(37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at \)110,000 for land and \(320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are \)230,000 and \(690,000.
3. Items of machinery and equipment were purchased at a total cost of \)400,000. Additional costs were incurred as follows.

Freight and unloading	\(13,000
Sales taxes	20,000
Installation	26,000

1. Expenditures totaling \)95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
2. A machine costing \(80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has been recorded on the basis of a 10-year life.
3. A machine was sold for \)20,000 on July 1, 2017. Original cost of the machine was \(44,000 on January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of \)2,000.

Instructions

(Round to the nearest dollar.)

a. Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Buildings

Land Improvements Equipment

(Hint: Disregard the related accumulated depreciation accounts.)

b. List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.

Short answer

Answer

1. Balance of accounts
2. Land account $485,000
3. Building account $1,655,000
4. Land improvement account $235,000
5. Equipment account $1,295,000
6. The tract of land should be included in Lobo’s balance sheet. Land and building values were not used by Lobo as described in Mendota's books.

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

LOBO CORPORATION Analysis of Land Account 2017
Balance at January 1, 2017	$ 300,000
Plant facility acquired from Mendota Company—portion of fair value allocated To land (Schedule 1)	185,000
Balance on December 31, 2017	$ 485,000

(a 2) Analysis of Building Account

LOBO CORPORATION Analysis of Land Improvements Account 2017
Balance at January 1, 2017	$ 140,000
Parking lots, streets, and sidewalks	95,000
Balance on December 31, 2017	$ 235,000

(a 3) Analysis of Leasehold Improvement

LOBO CORPORATION Analysis of Buildings Account 2017
Balance at January 1, 2017	$1,100,000
Plant facility acquired from Mendota Company—portion of fair value allocated to building (Schedule 1)	555,000
Balance at December 31, 2017	$1,655,000

(a 4) Analysis of Equipment

LOBO CORPORATION Analysis of Equipment Account 2017
Balance at January 1, 2017	$ 960,000
Cost of new equipment acquired
Invoice price $400,000
Freight and unloading costs 13,000
Sales taxes 20,000
Installation costs 26,000	459,000
	1,419,000
Deduct the cost of equipment disposed of
Equipment scrapped June 30, 2017 $ 80,000
Equipment sold July 1, 2017 44,000	124,000
Balance on December 31, 2017	$1,295,000

Note:The accumulated depreciation account can be ignored for equipment sold and equipment scraped as part of the problem.

Preparation of Schedule 1

Computation of Fair Value of Plant Facility Acquired from Mendota Company and Allocation to Land and Building
20,000 shares of Lobo common stock at $37 quoted market price on the date of the exchange	$740,000

Allocation to land and building accounts in proportion to appraised values at the exchange date:
	Amount	Percentage of total
Land	$230,000	25
Building	690,000	75
Total	$920,000	100

	Calculation	Amount
Land		$185,000
Building		555,000
Total		$740,000

 Step 6: (b) Explaining the 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. Lobo's balance statement should include the parcel of property, which was purchased for $150,000 as a prospective future development location.
2. Land and building values were not used by Lobo as described in Mendota's books.
3. The loss of $12,080 (Schedule 2) sustained on the dismantling of a machine on June 30, 2017, should be reflected in Lobo's income statement's other costs and losses section. The $67,920 in accumulated depreciation (Schedule 3) should be deducted from Lobo's balance sheet's Accumulated Depreciation—Equipment Account.
4. The $3,000 loss on equipment sale on July 1, 2017 (Schedule 4) should be reflected in Lobo's income statement's other costs and losses section. The $21,000 in accrued depreciation (Schedule 4) should be deducted from Lobo's balance sheet's Accumulated Depreciation—Equipment Account.

Preparation of Schedule 2

Loss on Scrapping of Machine June 30, 2017
Cost, January 1, 2009	$80,000
Less: Accumulated depreciation (double-declining-balance method, 10-year life) January 1, 2009, to June 30, 2017 (Schedule 3)	67,920
Asset book value June 30, 2017	$12,080
Loss on scrapping of machine	$12,080

Preparation of Schedule 3

Year	Book Value at Beginning of Year	Depreciation Expense	Accumulated Depreciation
2009	$80,000	$16,000	$16,000
2010	64,000	12,800	28,800
2011	51,200	10,240	39,040
2012	40,960	8,192	47,232
2013	32,768	6,554	53,786
2014	26,214	5,243	59,029
2015	20,971	4,194	63,223
2016	16,777	3,355	66,578
2017(6 months)	$13,422	$1,342	$67,920

Preparation of Schedule 4

Loss on Sale of Machine July 1, 2017
Cost, January 1, 2014	$44,000
Less: Depreciation (straight-line method, salvage value of $2,000, 7-year life) January 1, 2014, to July 1, 2014	21,000
Asset book value July 1, 2017	$23,000
Asset book value	$23,000
Less: Proceeds from the sale	20,000
Loss on sale	$ 3,000