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In: Accounting

Problem 11-10 Martinez Corporation, a manufacturer of steel products, began operations on October 1, 2016. The...

Problem 11-10

Martinez Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Martinez 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.

1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Martinez paid $844,000 for the land and building together. At the time of acquisition, the land had an appraised value of $86,100, and the building had an appraised value of $774,900.
3. Land B was acquired on October 2, 2016, in exchange for 2,600 newly issued shares of Martinez’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $28 per share. During October 2016, Martinez paid $15,300 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Martinez had paid $307,000 of the estimated total construction costs of $428,900. It is estimated that the building will be completed and occupied by July 2019.
5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at $38,900 and the salvage value at $2,700.
6. Machinery A’s total cost of $181,800 includes installation expense of $540 and normal repairs and maintenance of $14,400. Salvage value is estimated at $6,500. Machinery A was sold on February 1, 2018.
7. On October 1, 2017, Machinery B was acquired with a down payment of $5,280 and the remaining payments to be made in 11 annual installments of $5,540 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).

Present value
of $1.00 at 8%

Present value
of an ordinary annuity
of $1.00 at 8%

10 years 0.463 10 years 6.710
11 years 0.429 11 years 7.139
15 years 0.315 15 years 8.559


Complete the schedule below. (Round answers to 0 decimal places, e.g. 45,892.)

Assets

Acquisition Date

Cost Salvage

Depreciation Method

Estimated Life in Years

2017 2018
Land A
October 1, 2016
(1)
$___
N/A
N/A
N/A
N/A
N/A
Building A
October 1, 2016
(2)
___
$43,400
Straight-line
(3) ___
$14,616
(4) ___
Land B
October 2, 2016
(5)
___
N/A
N/A
N/A
N/A
N/A
Building B
Under Construction
$307,000 to date
Straight-line
30 __ (6) ___
Donated Equipment
October 2, 2016
(7)
___
2,700
150% declining-balance
10 (8) ___ (9) ___
Machinery A
October 2, 2016
(10)
___
6,500
Sum-of-the-years'-digits
8 (11) ___

(12) ___

Machinery B
October 1, 2017
(13)
___
Straight-line
20 __ (14) ___

Solutions

Expert Solution

Assets Acquisition Date Cost Salvage Depreciation Method Estimated Life in Years 2017 2018
Land A October 1, 2016 $ 84,400 N/A N/A N/A N/A N/A
Building A October 1, 2016 $ 759,600 $ 43,400 Straight-line 49 years 14,616 14,616
Land B October 2, 2016 $ 88,100 N/A N/A N/A N/A N/A
Building B Under Construction $ 307,000 to date - Straight-line 30 N/A N/A
Donated Equipment October 2, 2016 $ 38,900 $ 2,700 150 % declining balance 10 5,616 4,774
Machinery A October 2, 2016 $ 167,400 $ 6,500 Sum of the years digits method. 8 34,638.20 2,607
Machinery B October 1, 2017 $ 47,993 - Straight-line 20 600 2,400

1. Cost of Land A = $ 86,100 / $ ( 86,100 + 774,900) * $ 844,000 = $ 86,100 / $ 861,000 * 844,000 = $ 84,400.

2. Cost of Building A = $ 774,900 / $ 861,000 * $ 844,000 = $ 759,600.

3. Estimated life = ( Cost - Salvage ) / Annual Depreciation = $ ( 759,600 - 43,400) / $ 14,616 = 49 years.

4. Under SLM, annual depreciation for 2018 remains the same as in 2017 at $ 14,616.

5. Cost of Land B = 2,600 shares x $ 28 / share + $ 15,300 = $ 88,100.

6. Since the construction of Building B will be completed only in 2019, no depreciation is chargeable in 2018. Depreciation cannot be charged until the asset is put into use.

7. The cost of the asset is the fair value of the asset as on the date of its acquisition.

8. Depreciation for the year 2016 = $ 38,900 x 100 / 10 x 1.5 x 3/12 = $ 1,458.75

Depreciation for 2017 = $ ( 38,900 - 1,459) x 15 % = $ 5,616

9. Depreciation on donated equipment for 2018 = $ ( 38,900 - 1,459 - 5,616) x 15 % = $ 4,773.75

10, Cost of Machinery A = Installed Cost = Total Cost - Normal Repairs = $ 181,800 - $ 14,400 = $ 167,400.

11. Annual depreciation of Machinery A for first year of operations = $ ( 167,400 - 6,500 ) x 8/36 x 9 /12 + $ ( 167,400 - 6,500) x 7 / 36 x 3/ 12 = $ 26,816.67 + $ 7,821.53 = $ 34,638.20

12. Depreciation of Machinery A for 2018 = $ ( 167,400 - 6,500) x 7/36 x 1/12 = $ 2,607.

13. Cost of Machinery B = $ 5,280 + $ 5,540 x 7.710 = $ 47,993

14. Annual depreciation on Machinery B = $ 47,993 / 20 = $ 2,399.65

PVAD 8%, 11 years = 7.139 x 1.08 = 7.710


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