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	Acquistion 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

Assets	Acquisition date	Cost	Residual	Depreciation method	Estimated life in years	Depreciation
						2015	For year ended on 9/30/2016
Land A	10/1/2014	$65,000	N/A	N/A	N/A	N/A	N/A
Building A	10/1/2014	$747,500	$47,500	SL	50	$14,000	$14,000
Land B	10/2/2014	$85,400	N/A	N/A	N/A	N/A	N/A
Building B	Under Construction	$210000 to date	-	SL	30	-	NIL
Donated Equipment	10/2/2014	$16,000	$2,000	150% Declining Balance	10	$2,400	$2,040
Machine A	10/2/2014	$99,000	$5,500	Sum of the year's digit	10	$17,000	$5,100
Machine B	10/1/2015	$30,840	-	SL	15	-	$2,056

1. Cost of Land A - The company paid $812500 in lump sum for Land A and Building A.

The fair market value at the time of acquisition is $72000 for Land and $828000 for Building.

Hence, $812500 will be allocated to Land and Building proprotionately based on Fair value

Land A = $812500 x {72000/(72000+828000)}

= $65000

2. Building A = $812500 x {828000/(72000+828000)}

= $747500

3. Estimated Life in years = ($747500-$47500)/$14000 (Depreciation every year)

= 50 years

4. Straight line Depreciation on Building A = ($747500-$47500)/50 = $14000 every year

5. Cost of Land B = (3000 shares x $25) + $10400 for demolishing

= 75000 + 10400

= $85400

6. Depreciation is charged only when the asset is in use. Building B is not yet ready to use.

so the depreciation is NIL.

7. Fair value of Donated Equipment will be taken as its cost to calculate Depreciation

8. To calculate the rate of depreciation in 150% declining balance method we have to divide

1 by number of estimated life in years

Depreciation Rate = 1/10 x 150%

= 15%

Depreciation for 2015 = $16000 x 15%

= $2400

9. Depreciation for 2016 = ($16000-$2400) x 15%

= $2040

10. Cost of Machine A = $110000 - $11000

= $99000

Normal repair and maintenance is not included in the cost of the asset

11. Applicable percentage = Number of years of estimated life remaining at the beginning of the year / SYD

SYD = n(n+1)/2

n=number of years

SYD = 10(10+1)/2 = 55

Applicable percentage for 2015 = 10/55 = 18.1818%

Depreciation for 2015 = ($99000 - $5500) x 18.1818%

= $17000

12. Applicable percentage for 2016 = 9/55 = 16.3636%

Depreciation for 2016 = ($99000 - $5500) x 16.3636% x 4/12

= $5100

13. Cost of Machine B = Down Payment + Present value of Annuity at 8%

= $4000 + ($4000 x 6.71008)

= $4000 + $26840

= $30840

14. Depreciation on Machine B = $30840 / 15 years

= $ 2056