Question

Required:

Supply the correct amount for each numbered item on the schedule. Round each answer to the nearest dollar.(AICPA adapted)

Property, plant, and equipment and intangible assets; comprehensive

The Thompson Corporation, a manufacturer of steel products, began operations on October 1, 2014. The accounting department of Thompson has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel:

a. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.

b. Land A and Building A were acquired from a predecessor corporation. Thompson paid $812,500 for the land and building together. At the time of acquisition, the land had a fair value of $72,000 and the building had a fair value of $828,000.

c. Land B was acquired on October 2, 2014, in exchange for 3,000 newly issued shares of Thompson’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $25 per share. During October 2014, Thompson paid $10,400 to demolish an existing building on this land so it could construct a new building.

d. Construction of Building B on the newly acquired land began on October 1, 2015. By September 30, 2016, Thompson had paid $210,000 of the estimated total construction costs of $300,000. Estimated completion and occupancy are July 2017.

e. Certain equipment was donated to the corporation by the city. An independent appraisal of the equipment when donated placed the fair value at $16,000 and the residual value at $2,000.

f. Machine A’s total cost of $110,000 includes installation charges of $550 and normal repairs and maintenance of $11,000. Residual value is estimated at $5,500. Machine A was sold on February 1, 2016.

g. On October 1, 2015, Machine B was acquired with a down payment of $4,000 and the remaining payments to be made in 10 annual installments of $4,000 each beginning October 1, 2016. The prevailing interest rate was 8%.

Assets	Acquisition Date	Cost	Residual	Depreciation Method	Estimated life in years	Depreciation 2015	for year ended 9/30 2016
Land A	10/1/14	$ (1)	N/A	N/A	N/A	N/A	N/A
Building A	10/1/14	$ (2)	$47,500	SL	(3)	$14,000	$ (4)
Land B	10/2/14	(5)	N/A	N/A	N/A	N/A	N/A
Building B	Under consrtuction	$210,000 to date	-------	SL	30	--------	(6)
Donated Equipment	10/2/14	(7)	$2,000	150% declining balance	10	(8)	(9)
Machine A	10/2/14	(10)	$5,500	Sum of the years' didgits	10	(11)	(12)
Machine B	10/1/15	(13)	-------	SL	15	--------	(14)
N/A = not applicable

Required:

Supply the correct amount for each numbered item on the schedule. Round each answer to the nearest dollar.(AICPA adapted)

Answer 1

1. Cost of Land A.

Amount paid for Acquisition - $ 812,500

FMV of Land - $72,000

FMV of Building - $828,000

Total FMV - $900,000

Cost of Land - $72,000*812,500/900,000 = $65,000

Cost of Building - 828,000*812,500/900,000 = $747,500

2. Cost of Building A.

As calculated in 1 = $747,500

3. Estimated Life of Building A.

Depreciation of Building A = Cost of Building A - Residual Value

Estimated life of Building A

Therefore, Estimated Life of Building A = Cost of Building A - Residual Value

Depreciation of Building A

Therefore, Estimated Life of Building A = 747,500 - 47,500

14,000

= 50 years.

4. Depreciation of Building A for year ended 9/30 2016

As depreciation is on Straight line Basis, hence it will be same as 2015 Depreciation which is = $14,000

5. Cost of Land B

No. of Shares issued = 3,000

Fair Value per share = $25

Cost of Land = (3,000 X 25) + Demolition cost of Old Building (10,400)

= 75,000+ 10,400

= $85,400

6. Depreciation on Building B for the year ended 09/30 2016.

There will be no depreciation as the Building construction will be complete in July 2017 and depreciation will be charged thereon.

7. Cost of Donated Equipment.

Equipment will be valued at fair value which is given as $16,000.

8. Depreciation on Donated Equipement for 2015.

Calculation of Rate of Depreciation.

Rate based on usefull life - 1/ Estimated life X 100 = 10%

150 % of the rate = 10% X 150% = 15%

Depreciable value of Asset = Cost - Residual Value.

= 16,000- 2,000 = $14,000

Depreciation for 2015 = 14,000 X 15% = $2,100

9. Depreciation on Donated Equipment for the year ended 09/30 2016.

Depreciable Value of Asset for 2016 based on declining method = 14,000 - Depreciation of 2015 = 14,000 - 2,100 = $11,900

Depreciation for 2016 = 11,900 X 15% = $1,785

10. Cost of Machine A.

Assuming normal Repairs were not at the time of installation the cost of Machine will be excluding these charges = $110000 - 11,000 = $99,000

Installation charges are part of Asset's cost hence will remain included in the Cost of Machine.

11. Depreciation of Machine A for 2015.

Depreciable value of Asset = 99,000 - Residual Value = 99,000 - 5,500= $93,500

Sum of the years digit method

Depreciable value	Remaining Life	Depreciation Fraction	Depreciation	Book Value
93500	10	10/55	17000	76500
93500	9	9/55	15300	61200
93500	8	8/55	13600	47600
93500	7	7/55	11900	35700
93500	6	6/55	10200	25500
93500	5	5/55	8500	17000
93500	4	4/55	6800	10200
93500	3	3/55	5100	5100
93500	2	2/55	3400	1700
93500	1	1/55	1700	0
	55		93500

So Depreciation for 2015 is 17,000.

12. Depreciation of Machine A for year ended 9/30 2016.

Asset was sold in 1 Feb 16. So Depreciation will be charged for 4 months.

Depreciation as per sum of digit method = 15,300 X 4/12 = $5,100

13. Cost of Machine B.

Cost will be = Down Payment + Present Value for $4000 (Interest @8%, 10yrs)

= 4,000 + (4,000 X 6.7101)

= $30,840

PV factor  (Interest @8%, 10yrs) = 6.7101

14. Depreciation of Machine B for year ended 09/30 2016.

Depreciation is on Straight line Basis hence it will be = 30840/ No. of years of estimated life.

= 30840/15

= $2,056