Question

#5 – CH 10/11 TANGIBLE ASSETS AND ADJUSTMENTS

You are engaged in the examination of the financial statements for Luke Ltd for the current year ended December 31. The analysis that follows for tangible capital assets and related accumulated amortization was prepared by the client. You have verified the opening balances to your prior year’s working paper file.

Your examination reveals the following information:

1. All plant and equipment were depreciated on the straight-line basis (no residual value taken into consideration) using the following estimated lives: buildings, 25 years; all other items, 10 years. The company’s policy was to take one-half year’s depreciation on all asset acquisitions and disposals during the year.

2. On April 1, the company entered into a 10-year lease contract for a die-casting machine with annual rentals of $8,000 payable in advance every April 1. The lease could be cancelled by either party (60 days written notice is required) and there was no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine was 10 years with no residual value. The company recorded the die casting machine in the Machine and Equipment account at $55,962, the present discounted value at the date of lease, and $2,798, applicable to the machine, was included in amortization expense for the year. (Hint: Leases with these conditions should not be capitalized nor should a liability be recognized.)

3. The company completed the construction of a wing on the plant building on June 30 of the current year. The useful life of the building was not extended by this addition. The lowest construction bid received was $51,000, the amount recorded in the Buildings account. Company personnel constructed the addition at a cost of $48,000 (materials, $24,000; labour, $15,000; and overhead, $9,000). The $3,000 difference was credited to an account called Gain on Self-Construction of Building Addition.

4. On August 18, $15,000 was paid for paving and fencing a portion of land owned by the company to be used as a parking lot for the employees. The expenditure was charged to the Land account.

5. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5 regarding disposal of a machine purchased in July 4 years ago, for $60,000. The bookkeeper recorded amortization expense of $4,500 on this machine in the current year.

6. The city of Moose Jaw donated land and a building appraised at $20,000 and $69,000 respectively to Luke Ltd. For a plant. On September 1, the company began operating the plant. Because the company paid nothing for these assets, the bookkeeper made no entry to record the transaction.

LUKE LTD.

Analysis of Capital Assets and

Related Accumulated Amortization Accounts

Current Year Ended December 31

Capital Assets

Description	Final Opening	Additions	Retirements	Per Books Before Closing
		Description
Land	$ 85,000	$ 15,000		$100,000
Buildings	160,000	51,000		211,000
Mach & Equip	400,000	55,962	$ 30,000	425,962
	$ 645,000	$ 121,962	$ 30,000	$ 736,962
		Accumulated Amortization
Description	Final Opening	Additions*	Retirements	Per Books Before Closing
Buildings	$ 80,000	$ 7,420		$ 87,420
Mach & Equip	156,000	40,298		196,298
	$ 236,000	$ 47,718		$ 283,718

*Amortization expense for the year

Required:

Prepare the journal entries at current year end December 31 to adjust the accounts for the transactions noted above. Disregard income tax implications. The books have not been closed. Computations should be rounded to nearest dollar

Answer 1

Note No. 1- When any kind of expenditure on building doesn't extend the Useful life of building then it shouldn't be counted as Capital Expenditure or Addition to building.Those expenses Should be treated as Repairs and maintenance or Revenue Expenditure.

Note No.2- For any Lease to be classified as Finance lease, Some of The conditions, inter alia, prescribed to be complied with as per Accounting Standard-19, are as below:

(a) Present Value of all discounted rentals equals to 90% or above the cost of Leased Asset. (But, In the question above, It equals 70% approx. )

(b) Generally, The option is given to lessee to purchase the asset by the end of the lease period.

(c) The lease period covers the maximum of economic life of asset.