Question

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%.

                                             THOMPSON CORPORATION   

                             Fixed Asset and Depreciation Schedule

For Fiscal Years Ended September 30, 2015 and September 30, 2016

                                                                                                            

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 Construction	$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' -digits	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

Solution

(1) Cost of Land A

Value of Land will be calculated in Proportion to Fair Value

Total Fair value of Land and Building = ($72000+$828000) = $900000

Cost of Land = ($72000/$900000)*$812500 = $65000

(2) Cost of Building A

Proportionate cost of Building A = ($828000/$900000)*$812500 = $747500

(3) Estimated Life of Building A

Method of Depreciation = Straight line (SL)

Estimated Life = (Asset cost - Salvage value)/Depreciation per year

Estimated Life = ($747500 - $47500)/$14000 = 50 Years

(4) Depreciation for year 2016

Depreciation = $14000

Since in straight line method, Depreciation is equal every year

(5) Cost of Land B

Particulars	Amount
Purchase value (in exchange of shares) (3000*$25)	$75000
Demolition cost	$10400
Total cost of Land B	$85400

(6) Depreciation for 2016 on Building B

Depreciation = $0

There is no depreciation until the asset is put to use. Building B is still under construction hence no depreciation will be charged since asset is not been put to use

(7) Cost of Donated Equipment

Cost of Donated Equipment will be its Fair value = $16000

(8) Depreciation for year 2015

Method of depreciation = 150% Declining Balance

Estimated life = 10 years i.e. 10% per year or 0.1 Per year

Rate of Depreciation = 150% * 0.1 = 15%

Depreciation amount = $16000 * 15% = $2400

(9) Depreciation for year 2016

Particulars	Amount
Cost of Donated Equipment	$16000
Less : Depreciation for year 2015	($2400)
Closing Value as on 2016	$13600
Depreciation amount ($13600*15%)	$2040

(10) Cost of Machinery A

Cost of Machinery does not include any normal repair and Maintenance expenses

Cost of Machinery A = $110000 - $11000 = $99000

(11) Depreciation for 2015

Method of Depreciation = Sum of Years digit

Estimated life = 10 years

Sum of Year =1+2+3+4+5+6+7+8+9+10 = 55

Salvage value = $5500

2015 is first year and Number of remaining year = 10 years

Depreciation for 2015 = ($99000-$5500)*($10 year/55 years) = $17000

(12) Depreciation for 2016

2016 is second year And remaining life becomes 9 years

Asset sold date = February 1 2016

Asset used period for 2016 = From 1st October 2015 to January 31 2016 = 4 Months

Depreciation for 2016 = ($99000 - $5500)*7/55*4/12 = $3967

(13) Cost of Machine B

Value of Present Value of annuity due for 10 years at 8%

Formula = [[1 - {1/(1+r)ⁿ}] * (1+r)]/r

r = 8%, n= 10 years

= [[1-{1/(1.08)¹⁰}] * (1.08)]/0.08

= [(1-0.4632)*(1.08)]/0.08

= 0.5798/0.08 = 7.25

Particulars	Amount
Down Payment	$4000
Present Value of annuity due ($4000*7.25)	$29000
Total cost of Asset	$33000

(14) - Depreciation for 2016

Method = Straight line

Formula = (Asset cost - Salvage value)/Estimated life

Depreciation = ($33000)/15 = $2200