Question

Exercise 10-5

Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company’s fee for title search                                                                                  $520

Architect’s fees                                                                                                                                3,170

Cash paid for land and dilapidated building thereon                                                         87,000

Removal of old building                                                                                 $20,000

   Less: Salvage                                                                                                   5,500                     14,500

Interest on short-term loans during construction                                                              7,400

Excavation before construction for basement                                                                    19,000

Machinery purchased (subject to 2% cash discount, which was not taken)            55,000

Freight on machinery purchased                                                                                               1,340

Storage charges on machinery, necessitated by noncompletion of                                                          

   building when machinery was delivered                                                                             2,180

New building constructed (building construction took 6 months from                                                     

   date of purchase of land and old building)                                                                         485,000

Assessment by city for drainage project                                                                                                1,600

Hauling charges for delivery of machinery from storage to new building                 620

Installation of machinery                                                                                                              2,000

Trees, shrubs, and other landscaping after completion of building                                                           

   (permanent in nature)                                                                                                                               5,400

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Company uses net method to record discount. (Please leave spaces blank if there is no answer. Do not enter zeros in those spaces.)

Land                      Buildings              Machinery and Equipment          Other

Abstract company’s                        $                              $                                              $                                              $

fee for title search                          

Architect’s fees               

Cash paid for land and old building                          

Removal of old building                

Interest on short-term loans during construction                             

Excavation before construction for basement                   

Machinery purchased                   

Freight on machinery purchased                              

Storage charges on machinery                  

New building constructed                           

Assessment by city for drainage project                               

Hauling charges               

Installation of machinery                             

Trees, shrubs, and other landscaping                     

Answer 1

Answer

Particulars	Land	Buildings	Machinery and Equipment	Other	Explanation
Abstract company’s fee for title search	520				It is a pre-requisite expense for a buyer in relation to a property. It is debited to the land being acquired.
Architect’s fees		3170			architect’s fee is directly related to development of building. Hence, it is debited to building
Cash paid for land and old building	87000				It forms part of the cost of land since it is the basic amount that the buyer pays to acquire land and old building
Removal of old building	14500				Any amount received as a scrap reduces the costs being incurred. Hence, costs related to removal of old building is debited with $14,500, that is $20,000 less $5,500 realized as salvage value.
Interest on short-term loans during construction		7400			Interest cost incurred during construction of building is the cost of short-term borrowings used to finance the cost of construction of the building. So,debited with building
Excavation before construction for basement		19000			cost directly related with the construction of the building. Hence, it is debited with building.
Machinery purchased			53900	1100	machinery purchased is debited with net of discount (2%) amount of $53,900 and discount of $1,100 is recorded as a miscellaneous cost in the books of account.
Freight on machinery purchased			1340		freight paid on machinery purchased is a debited with the cost paid for the asset.
Storage charges on machinery				2180	alteration or bringing any asset to its intended place of use. It is a cost required to be incurred for non-performance of other work. Hence, it is an expense and is not to be debited with any asset.
New building constructed		485000			These are direct costs associated with the construction of building and hence debited to the building.
Assessment by city for drainage project	1600				it gets debited to the cost of land as it is related to the acquisition of land and the activities that are proposed to be done on land thereto.
Hauling charges				620	Any subsequent movements are charged as expense in the books. Hence, hauling charges incurred subsequently are expensed off.
Installation of machinery			2000		Installation cost of machinery is incurred to make the machinery ready for use as intended by the management. Installation cost becomes a pre-requisite for machinery to work. Hence, installation cost of machinery is debited to machinery.
Trees, shrubs, and other landscaping	5400				Certain land improvements are carried out to make the land ready for its intended use. The land improvements include the landscaping, growing of trees which makes land usable. Hence, these costs are debited along with land and recognized as assets in the books of account.
Total	109020	514570	57240	3900

Working

Machinery purchased = $55000 - 2% =$53900