Question

12. Gibbs Manufacturing Co. was incorporated on January 1, 2012, but was unable to begin manufacturing activities until August 1, 2012, because new factory facilities were not completed until that date. Gibbs reported the following during the year: Date Item Amount 1/31/12 Land and rundown building estimated market value $200,000 2/28/12 Cost of removing building 4,000 4/1/12 Legal fees 6,000 5/1/12 Fire Insurance premium payment 5,400 5/1/12 Special tax assessment for streets 4,500 5/1/12 Partial payment of new building construction 170,000 8/1/12 Final payment on building construction 170,000 8/1/12 General expenses 30,000 12/31/12 Asset write-up 75,000 $664,900 Additional information: To acquire the land and building on January 31, the company paid $100,000 cash and issued 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a fair value per share of $140. When the old building was removed, Gibbs paid Kwik Demolition Co. the $4,000 shown above, but also received $1,500 from the sale of salvaged material. Legal fees covered the following: Legal fees to create the corporation $2,500 Negotiating purchase of the land and rundown building 2,000 Legal work in connection with the building construction 1,500 $6,000 The fire insurance premium covered premiums for a three-year term beginning May 1. General expenses shown above include the following Advertising $20,000 Plant superintendent covering supervision of new building 10,000 $30,000 Because of the rising land costs, the President was sure that the land was worth at least $75,000 more than what it cost the company, which is reflected above in the asset write-up on December 31. 6. Determine the proper balances as of December 31, 2012, for the Land and the Building accounts. (8 points) Please show your calculations to receive partial credit.

Answer 1

Prepare "T" accounts to post the balance of land for the month December 31, 2012: Land Debit Date Credit Date mp Explanation 31-Jan Balance b/d Explanation Cash received from sales $200,000 $1,500 $4,000 28-Feb Cost of removing building Examination of purchase 1-Apr of land 1-May Special tax $2.000 $4,500 31-Dec Balance $209,000, Prepare "T" accounts to post the balance of building for the month December 31, 2012: I------------ Building Debit | Date | Explanation | Credit $1,500 Date Explanation Legal work for 1-Apr constructing a building Partial payment of new building 1-Aug Final payment 1-Aug Plant superintendent 1-May $170,000 $170,000 $10,000 31-Dec Balance $351,500

Working notes Determine the cost of building: Amount $170,000 $170,000 Particulars Partial payment of new building Final payment Legal work for constructing a building General expenses: Plant superintendent Cost of building $1,500 $10,000 S351,500 Therefore, the cost of building is $351,500

Determine the cost of land: Amount $200,000 $4,000 Particulars Beginning Balance Cost of removing building Legal fees: Examination of purchase of land Special tax $2,000 $4,500 $210,500 ($1,500) Less: cash received from sales Cost of land $209,000 Therefore, the cost of land is $209,000