Question

intermediate accounting 1

Question 2 - Application

MH Plumbing Inc. (MH) is the largest plumbing contractor in Moncton, Alberta. Information on selected transactions/events is given below:

a.      On 15 January 2012, MH purchased land and a warehouse building for $455,000. The land was appraised at $175,000, while the building was appraised at $375,000.

b.      During January and February 2012, MH spent $53,200 on the warehouse building, renovating it for its expected use as a storage and shipping facility.

c.       MH used the warehouse building from February 2012 until August 2018. The building was expected to have a 20-year life and a residual value of $11,000.

d.      In late August 2018, MH traded the warehouse and land for another facility on the other side of town. The second facility was slightly larger. MH paid $33,750 to the vendor, and $19,800 in legal fees as a result of the transaction. The new warehouse was appraised at $425,000, and the new land at $180,000. This warehouse facility was expected to have a useful life of 18 years and a residual value of $7,800.

e.      MH used the new warehouse facility from August 2018 until February 2019. At that time, a fire destroyed the warehouse. MH received $356,800 from the insurance company.

f.        MH called for tenders for construction of a new warehouse building in March 2019, but the lowest bid was $788,000. The company decided to self-construct and began in May 2019. Monies spent were as follows:

Architect fees	$ 80,000
Removing debris from building site	13,400
Material cost for construction	245,800
Labour cost for construction	199,600
Parking lot	45,200
Specific overhead assigned to construction	24,800
Interest on loans related to construction	34,100

g.      MH received a $100,000 investment tax credit in 2019 as a result of the building activities, which reduced 2019 taxes payable.

h.      MH occupied its new warehouse in September 2019. It was appraised at $650,000. It was expected to last for 25 years, and have a residual value of $20,000.

Required:

Prepare journal entries to record all transactions listed above, including annual depreciation to the end of 2019. Record annual depreciation using a declining-balance method of 10% for buildings, and 8% for parking lots. MH records a full year of depreciation in the year of acquisition and no amortization in the year of disposal. Justify any decisions made with respect to accounting policy or application.

Answer 1

a	land A/c Dr	$4,55,000
	Warehouse building	$4,55,000
		To bank A/c	$9,10,000
b	Appraisal entry
	land A/c Dr	$1,75,000
		To P&l A/c	$1,75,000
	Ware house buliding A/c Dr	$3,75,000
		To P&l A/c	$3,75,000
	Ware house renovation entry
	Ware house buliding A/c Dr	$53,200
		To Bank A/c	$53,200
c	Value of Ware house Buliding
	$455000+$375000+$53200
	$8,83,200	Total value
Expected life	20 years
	residual value	$1,10,000
	Usage is ony for 6. years
Depreciation for year	$883200-$11000/6
	$1,34,184.60	Per year
d	Legal fee entry
	Legal fee expense Dr	$53,500
		To Bank A/c	$53,500
	New warehouse A/c Dr	$4,25,000
	New land A/c	$1,80,000
		To P&l A/c	$6,05,000
	New warehouse facility dep cal
	$425000-$7800/18
	$23,177.78	Per year
	Dep for 6 months	$11,588.89
e	Loss	$425000-$11588.59
		$4,13,411
Entry for insurance claim received
	Bank A/c Dr	$3,56,800
		To insurance claim A/c	$3,56,800
f	Let the project be Project A
	Project A /c Dr	$6,42,900				Architect fee	$80,000
		To bank A/c	$6,42,900			Debris	$13,400
						Matereial	$2,45,800
						labour	$1,99,600
						parking	$45,200
						Overheads	$24,800
						Interest	$34,100
							$6,42,900
g	Bank A/c Dr	$1,00,000
		To investment Tax Creditt	$1,00,000
h	New ware house A/c Dr	$6,50,000
		To P&l A/c	$6,50,000
	New project A	$642900+$65000
		$12,92,900
	Residual value	$20,000
	Depreciation per year	$1292900-$20000/25
		$50,880