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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

Expert verified

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: Pueblo Co. acquires machinery by paying \(10,000 cash and signing a \)5,000, 2-year, zero-interest-bearing note payable. The note has a present value of \(4,208, and Pueblo purchased a similar machine last month for \)13,500. At what cost should the new equipment be recorded?

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

(Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.

Instructions

For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.

  1. __________ Improvement.
  2. __________ Replacement of a minor broken part on a machine.
  3. __________ Expenditure that increases the useful life of an existing asset.
  4. __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
  5. __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.
  6. __________ Expenditure that increases the quality of the output of the productive asset.
  7. __________ Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life.
  8. __________ Ordinary repairs.

Question: One financial accounting issue encountered when a company constructs its own plant is whether the interest cost on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?

Hanson Company (see BE10-2) borrowed \(1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, \)2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.
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