Question

In: Accounting

At January 1, 2018, Hammersmith Limited reported the following property, plant, and equipment accounts: Accumulated depreciation—buildings...

At January 1, 2018, Hammersmith Limited reported the following property, plant, and equipment accounts: Accumulated depreciation—buildings $24,200,000 Accumulated depreciation—equipment 30,000,000 Buildings 57,000,000 Equipment 96,000,000 Land 8,000,000 The company uses straight-line depreciation for buildings and equipment, its year end is December 31, and it makes adjusting entries annually. The buildings are estimated to have a 40-year life and no residual value; the equipment is estimated to have a 10-year useful life and no residual value. During 2018, the following selected transactions occurred: Apr. 1 Purchased land for $3.8 million. Paid $950,000 cash and issued a 10-year, 6% mortgage payable for the balance. Interest is payable at maturity. May 1 Sold equipment for $700,000 cash. The equipment cost $1.5 million when it was originally purchased on January 1, 2014. June 1 Sold land for $2.4 million. Received $760,000 cash and accepted a 6% note for the balance. The note is due at maturity. The land cost $600,000 when purchased on June 1, 2008. July 1 Purchased equipment for $2 million on account, terms n/60. Sept. 2 Paid amount owing on account for purchase of equipment on July 1. Dec. 31 Retired equipment that cost $940,000 when purchased on January 1, 2009. No proceeds were received. 31 Tested land for impairment and found that its recoverable value was $11 million. Instructions

(a) Record the above transactions.

(b) Record any adjusting entries required at December 31.

(c) Prepare the property, plant, and equipment section of the company’s statement of financial position at December 31. Identify intangible assets and goodwill.

Could you give a explanation to how the answers were met? Thanks

Solutions

Expert Solution

(a)     April     1         Land ...................................................................           3,800,000

                                          Cash...........................................................                                            950,000

                                          Mortgage Payable......................................                                         2,850,000

         May      1         Depreciation Expense.........................................                50,000

                                          Accumulated Depreciation—Equipment.....                                           50,000

                                 ($1,500,000 ÷ 10 × 4/12 = $50,000)

                       1         Cash ...................................................................              700,000

                                 Accumulated Depreciation—Equipment...........              650,000

                                 Loss on Disposal................................................              150,000

                                          Equipment.................................................                                         1,500,000

                                                 

                                 Cash proceeds                                                                                         $700,000

                                 Cost                                                                             $1,500,000

                                 Accumulated depreciation—equipment

                                 [($1,500,000 ÷ 10) × 4 + $50,000)]                                 650,000

                                 Carrying amount                                                                                            850,000

                                 Loss on disposal                                                                                         $(150,000)

         June      1         Cash ...................................................................              760,000

                                 Notes Receivable................................................           1,640,000

                                          Land..........................................................                                            600,000

                                          Gain on Disposal.......................................                                         1,800,000

         July       1         Equipment..........................................................           2,000,000

                                          Accounts Payable..........................................                                     2,000,000

         Sept.     2         Accounts Payable...............................................           2,000,000

                                          Cash...........................................................                                         2,000,000

         Dec.     31        Depreciation Expense.........................................                94,000

                                          Accumulated Depreciation—Equipment.....                                           94,000

                                 ($940,000 ÷ 10 = $94,000)

                      31        Accumulated Depreciation—Equipment...........              940,000

                                          Equipment.................................................                                            940,000

                                         

                      31        Impairment Loss.................................................              200,000

                                          Land..........................................................                                            200,000

                                 (8,000,000 +3,800,000 – 600,000 = $11,200,000)

                                 ($11,200,000 – $11,000,000 = $200,000)

(b)     Dec.      31       Depreciation Expense.........................................         1,425,000

                                          Accumulated Depreciation—Buildings....                                         1,425,000

                                 ($57,000,000 ÷ 40 = $1,425,000)

                                                 

                       31       Depreciation Expense.........................................           9,456,000

                                          Accumulated Depreciation—Equipment.....                                      9,456,000

                                 $93,560,000* ÷ 10                                                      $9,356,000

                                 $2,000,000 ÷ 10 × 6/12                                                   100,000

                                                                                                                     $9,456,000

                                 *$96,000,000 – $1,500,000 – $940,000 = $93,560,000

                       31       Interest Expense.................................................              128,250

                                          Interest Payable.........................................                                            128,250

                                 ($2,850,000 × 6% × 9/12 = $128,250)

                       31       Interest Receivable.............................................                57,400

                                          Interest Revenue.......................................                                              57,400

                                 ($1,640,000 × 6% × 7/12 = $57,400)

(c)                                                     HAMMERSMITHLIMITED

                                                 Statement of Financial Position (Partial)

                                                                   December 31, 2018

         Property, plant, and equipment*

                  Land...........................................................................                                             $11,000,000

                  Buildings....................................................................           $57,000,000

                  Less: Accumulated depreciation................................             25,625,000                31,375,000

                  Equipment..................................................................           $95,560,000

                  Less: Accumulated depreciation................................             38,010,000                57,550,000

                          Total property, plant, and equipment.................                                             $99,925,000

        

*See T accounts on the following page.

                                                                                Land

         

          Jan. 1, 2018                                   8,000,000 June 1, 2018                                                    600,000

          April 1, 2018                                 3,800,000         Dec. 31, 2018                                          200,000

         

          Dec. 31, 2018                      Bal. 11,000,000

                                                                            Buildings

         

          Jan. 1, 2018                                 57,000,000

         

          Dec. 31, 2018                     Bal. 57,000,000

                                                                           Equipment

         

          Jan. 1, 2018                                 96,000,000      May 1, 2018                                            1,500,000

          July 1, 2018                                  2,000,000      Dec. 31, 2018                                             940,000

         

          Dec. 31, 2018                      Bal. 95,560,000

                                                    Accumulated Depreciation—Buildings

                                                                                                     

                                                                                   Jan. 1, 2018                                              24,200,000

                                                                                Dec. 31, 2018                                               1,425,000

                                                                                                     

                                                                                Dec. 31, 2018                                    Bal. 25,625,000

                                                  Accumulated Depreciation—Equipment

         

          May 1, 2018                                     650,000        Jan. 1, 2018                                         30,000,000

          Dec. 31, 2018                                  940,000        May 1, 2018                                               50,000

                                                                                       Dec. 31, 2018                                             94,000

                                                                                       Dec. 31, 2018                                        9,456,000

                                                                                   Dec. 31, 2018                                   Bal. 38,010,000


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