1 answer

Smith Company was incorporated on January 2, 2021, but was unable to begin manufacturing activities until...

Question:

Smith Company was incorporated on January 2, 2021, but was unable to begin manufacturing activities until July 1, 2021, because new factory facilities were not completed until that date. The Land and Building account reported the following items during 2021:

January 31 Land and building $290,000

February 16 Cost of removal of building 26,000

March 1 Partial payment of new construction 75,000

May 1 Legal fees paid 3,600

June 1 Second payment on new construction 75,000

June 1 Insurance premium 2,880

June 30 General expenses 58,400

July 1 Final payment on new construction 150,000

July 1 Special tax assessment 6,000

December 31 Asset write-up 13,120

TOTAL 700,000

LESS: December 31 Depreciation-2021 at 1.25% (8,750)

December 31, 2021 Account Balance $691,250

The following additional information is to be considered

1. To acquire land and building on January 31, the company paid $50,000 cash and 2,400 shares of its 5% cumulative preferred stock, par value $100 per share. Fair value of the stock is $102 per share. Recommend to add to this information that the original entry included a credit to Preferred Stock for $240,000.

2. Cost of removal of old buildings amounted to $26,000, and the demolition company retained all materials of the building.

3. Legal fees covered the following

Cost of organization $ 800,

Examination of title covering purchase of land $1,100,

Legal work in connection with construction contract $1,700

4. Insurance premium covered the building for a 1-year term beginning June 1, 2021.

5. The special tax assessment covered drainage improvements that are permanent in nature.

6. General expenses covered the following for the period from January 2, 2018, to June 30, 2021

President’s salary $36,000

Plant superintendent’s salary—supervision of new building $10,400

Rent $12,000

7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building $13,120, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8. Estimated life of building—40 years. Depreciation for 2021—1.25% of asset value (1.25% of $700,000, or $8,750).

Instructions:

(a) Prepare entries to reflect correct land, building, and depreciation accounts at December 31, 2021. PREPARE SUPPORTING SCHEDULES TO SUPPORT YOUR JOURNAL ENTRIES.

(b) Show the proper presentation of land, building, and depreciation on the balance sheet at December 31, 2021


Answers

a)

Land (Schedule A)

$ 327,900.00
Building (Schedule B) $ 312,100.00
Insurance Expense (6 months X $2880/12) $     1,440.00
Prepaid Insurance (6 months X $2880/12) $     1,440.00
Rent $   12,000.00
Organization Expense $        800.00
Retained Earnings $   13,120.00
Salary Expense $   36,000.00
                          Land and Building $ 700,000.00
                         Share Premium—Preference (2400 shares X ($102 -$100) $     4,800.00
Schedule A
Acquisition Cost ($50,000 + [2400 X $102]) $ 294,800.00
Removal of Old Building $   26,000.00
Legal Fees (Examination of title) $     1,100.00
Special Tax Assessment $     6,000.00
Total $ 327,900.00
Schedule B
Legal Fees (Construction contract) $     1,700.00
Construction Costs (First payment) $   75,000.00
Construction Costs (Second payment) $   75,000.00
Plant Superintendent’s Salary $   10,400.00
Construction Costs (Final payment) $ 150,000.00

Total

$ 312,100.00
Land and Building $     8,750.00
               Depreciation Expense $     4,848.75
               Accumulated Depreciation—Building $     3,901.25
Schedule C

Depreciation taken

8750
Depreciation that should be taken (1.25% X $312,100) $   (3,901.25)
Depreciation adjustment $     4,848.75
2)
Plant, Property, and Equipment:
Land $ 327,900.00
Building $ 312,100.00
Less: Accumulated depreciation $   (3,901.25) $ 308,198.75
Total $ 636,098.75
.

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