Question

Riverbed 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 Buildings account reported the following items during 2021.

January 31		Land and buildings		$163,500
February 28		Cost of removal of building		9,960
May 1		Partial payment of new construction		61,660
May 1		Legal fees paid		4,480
June 1		Second payment on new construction		49,000
June 1		Insurance premium		2,280
June 1		Special tax assessment		4,130
June 30		General expenses		33,569
July 1		Final payment on new construction		27,990
December 31		Asset write-up		53,080
				409,649
December 31		Depreciation-2021 at 1%		(3,993	)
December 31, 2021		Account balance		$405,656

The following additional information is to be considered.

1.		To acquire land and building, the company paid $83,500 cash and 800 shares of its 8% cumulative preferred stock, par value $100 per share. Fair value of the stock is $127 per share.
2.		Cost of removal of old buildings amounted to $9,960, and the demolition company retained all materials of the building.
3.		Legal fees covered the following.

Cost of organization		$650
Examination of title covering purchase of land		1,390
Legal work in connection with construction contract		2,440
		$4,480

4.		Insurance premium covered the building for a 2-year term beginning May 1, 2021.
5.		The special tax assessment covered street improvements that are permanent in nature.
6.		General expenses covered the following for the period from January 2, 2021, to June 30, 2021.

President’s salary		$29,277
Plant superintendent’s salary-supervision of new building		4,292
		$33,569

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 $53,080, 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-50 years. Depreciation for 2021-1% of asset value (1% of $399,300, or $3,993).

(a)

Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2021. (Round answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

(b)

Prepare a balance sheet

Answer 1

83,500 101,600 Calculation of Cost of Land Acquistion price: Cash 8% Cumulative preference share (800 x $ 127) Cost of removal of old Building Examination of title covering purchase of land Special tax assessment Cost of Land 185,100 9,960 1,390 4,130 200,580 2) Calculation of Cost of Building First payment of construction 61,660 Legal fees in connection with construction 2,440 Second payment of construction contract 49,000 Insurance perimum for 2 months i.e. May and June 190 Plant superitendent's salary 4,292 Final payment of construction contract 27,990 Cost of Building 145,572 Notes: Insurance for 2 months included in the cost of Building because assets was put to use on July 1 and Insurance expenses was covered from May 1. So, all the expenses which was incurred before the assets put to use need to be capitalized. Insurance premium 2,280 Insurance coverage ( 2 year x 12) 24 Months Insurance premium per month (2,280/24) 95 Insurance premium for two months (95 x 2) 190 Depreciation charged Correct depreciation should be (145,572 x 1%) Adjustment in depreciation 3,993 (1,456) 2,537

Debit Credit Account titles and Explanation Land Buildings Insurance expense Prepaid Insurance Organization expense Retained Earnings Salaries and wages expense Land and Buildings Paid in capital in excess of par- common stock (800 x $ 27) 200,580 145,572 570 1,520 650 53,080 29,277 409,649 21,600 3,993 2 Land and Buildings Depreciation expense Accumulated Depreciation - Buildings 2,537 1,456 2,280 24 Months 95 Working Notes: Calculation of Insurance expense and Prepaid Insurance Insurance premium Insurance coverage Insurance premium per month (2,280/24) Insurance coverage in 2021 for (May - Dec) Insurance premium pertains to 2021 (95 x 8) Less: Insurance premium capitalized Insurance expense during the year Prepaid Insurance (2,280 - 760) 8 Months 760 570 1,520

Riverbed Company Balance Sheet December 31, 2021 200,580 Property, plant and Equipment Land Buildings Less: Accumulated Depreciation Total Property, Plant and Equipment 145,572 1,456 144,116 344,696