Question

485 Chapter 9 Long-Term Assets: Fixed and intangible Problems: Series A Оb, 1 PR 9-1A Allocating payments and receipts to fixed asset accounts The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale ceramic business. The receipts are identified by an asterisk. Land, $400,000 2,500 285,000 55,000 15,500 5,000 Fee paid to attorney for title search ... Cost of real estate acquired as a plant site: Land. a. b. Building (to be demolished). c. Delinquent real estate taxes on property, assumed by purchaser. d. Cost of razing and removing building acquired in (b). ... e. Proceeds from sale of salvage materials from old building f. Special assessment paid to city for extension of water main to the property. g. Architect's and engineer's fees for plans and supervision h. Premium on one-year insurance policy during construction. Cost of filling and grading land.. J. Money borrowed to pay building contractor... k. Cost of repairing windstorm damage during construction L. 4,000 29,000 60,000 6,000 12,000 i. 900,000* 5,500 32,000 Cost of paving parking lot to be used by customers m. Cost of trees and shrubbery planted n. Cost of floodlights installed on parking lot. o. Cost of repairing vandalism damage during construction. p. Proceeds from insurance company for windstorm and vandalism damage q. Payment to building contractor for new building..... Interest incurred on building loan during construction Refund of premium on insurance policy (h) canceled after 11 months 11,000 2,000 2,500 7,500 800,000 34,500 r. 500 S. Instructions 1. Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows: Land Improvements Other Accounts Land Building Item 2. Determine the amount debited to Land, Land Improvements, and Building. The costs assigned to the land, which is used as a plant site, will not be depreciated, 3. while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation. 4. What would be the effect on the income statement and balance sheet if the cost of filling and grading land of $12,000 [payment ()l was incorrectly classified as Land Improvements rather than Land? Assume Land Improvements are depreciated over a 20-year life using the double- declining-balance method. Оы 2

Answer 1

Answer-1 and 2-

Item	Land	Land Improvements	Building	Other Accounts
a.	2,500
b	340,000
c.	15,500
d	5,000
e	(4,000)
f	29,000
g			60,000
h			6,000
i	12,000
j				(900,000)
k				5,500
l		32,000
m		11,000
n		2,000
o				2,500
p				(7,500)
q			800,000
r			34,500
s			(500)
	400,000	45,000	900,000

3-Since Land used as plant site does not loose its ability to provide services, it is not depreciated. However, land improvements do loose their ability to provide services as time passes and are therefore depreciated.

4-Land improvements are depreciated

Depreciation expenses= $12,000*1/20*2= $1,200

Depreciation  Exp. Are overestated in the Income Statement by $1,200 and net income is understated by $1200.

On the Balance Sheet, Land would be understated by $12,000. Land Improvements are overstated by $10,800 and owners capital would be understated by $1200.

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