Question

1. You are engaged in the audit of the financial statements of Holman Corporation for the y ended December 31, 20X6. The accompanying analyses of the Property, Plant, and Equipment and related accumulated depreciation accounts have been prepared by the chi accountant of the client. You have traced the beginning balances to your prior year's aud working papers HOLMAN CORPORATION Analysis of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts Year Ended December 31, 20X6 Final 12/31/X5 Assets Per Ledger Description Land Buildings Machinery and equipment Additions Retirements 12/31/X6 $425,500 $ 5,200 18,500 122,000 387,000 $ 430,700 140,500 402,300 40,800 25,500 $ 934,500 $64,500 25,500 $ 973,500 Final Accumulated Depreciation 12/31/X5 Additions Retirements 12/31/X6 Per Ledger Description Buildings Machinery and equipment $ 61,000 5,250 39,605 $ 66,250 213,755 174,150 $ 235,150 $44,855 $ 280,005 "Depreciation expense for the year All plant assets are depreciated on the straight-line basis (no residual value taken into consideration) based on the following estimated service lives: building, 25 years; and all other items, 10 years. The company's policy is to take one half-year's depreciation on all asset additions and disposals during the year Your audit revealed the following information: 1. On April 1, the company entered into a 10-year lease contract for a die casting machine, with annual rentals of S5,200 payable in advance every April 1. The lease is cancelable by either party (60 days' written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated service life of the machine is 10 years with no residual value. The company recorded the die casting machine in the Machinery and Equipment account at S40,800, the present value at the date of the lease, and S2,040 applicable to the machine has been included in depreciation expense for the year 2. The company completed the construction of a wing on the plant building on June 30. The service life of the building was not extended by this addition. The lowest construction bid received was $18,300, the amount recorded in the Buildings account. Company personnel constructed the addition at a cost of $16,600 (materials, $7,700; labor, $5,700; and overhead, S3,200) 3. On August 18, $5,200 was paid for paving and fencing a portion of land owned by the company and used as a parking lot for employees. The expenditure was charged to the Land account. 4. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5 upon disposal of a machine purchased in July 20X2 for S46,000. The chief accountant recorded depreciation expense of S3,100 on this machine in 20X6 5. Harbor City donated land and a building appraised at $120,000 and $420,000, respectively, to Holman Corporation for a plant. On September 1, the company began operating the plant. Since no costs were involved, the chief accountant made no entry for the above transaction. 5 2 Required: Prepare the adjusting journal entries that you would propose at December 31, 20X6, to adjust the accounts for the above transactions. Disregard income tax implications. The accounts have not been closed. A. Record the entry to correct the April 1, 20X6 entry for the lease of a die casting B. Record the entry to correct the June 30, 20X6 entry for the addition to the building C. Record the entry to correct the June 30, 20X6 entry for the paving and fencing of the D. Record the entry to correct the September 5, 20X6 entry for the disposal of the E. Record the entry for the appraised value of the land and building donated by Harbor machine under a ten-year, cancelable lease having no renewal or purchase option and to correct depreciation parking lot, and to provide the depreciation thereon. machine and the depreciation thereon. City, and the depreciation of the building thereon.

Answer 1

JOURNAL ENTRY 4 Date Account Debit Credit 5 Apr-01 Lease liabilities $40,800 Machinery & Equipment Accumulated depreciation Depreciation expenses 6 $40,800 $2,040 $2,040 8 9 10 11 2) 12 13 14 15 Date 16 Jun-30 Expenses 17 18 19 20 3) 21 JOURNAL ENTRY Account Debit Credit $18,300 Building $18,300 JOURNAL ENTRY 23 24 Date 25 Jun-30 Expenses 26 Account Debit Credit $5,200 Land $5,200

20 3) 21 JOURNAL ENTRY 23 24 Date 25 Jun-30 Expenses 26 27 28 4) 29 30 31 32 Date Account Debit Credit $5,200 Land $5,200 JOURNAL ENTRY Account Debit Credit Accumulated depreciation-machinery $800 33 Sep-05|& equipment 34 35 36 37 (3100-2300) $800 Depreciation expenses Loss on disposal of asset Asset retirement $2,100 $2,100

38 workings: 39 Asset purchased in 20X2 for $46,000 40 Straight line depreciation per year on 10 years life-$4,600 41 Hal year convention: Depreciation in 20X2-$2,300 42 Depreciation in 20X3-$4,600 43 Depreciation in20X4-$4,600 44 Depreciation in20X5-$4,600 45 Depreciation in 20X6-S2,300 46 Depreciation charged in 20X6-S3,100 47 This needs to be rectified. The depreciation in 20X6 should be $2,300 48 The book value of the asset -$46,000-(total depreciation) -46000-18400-$27,600 49 The asset is sold at $25,500 50 Loss on sales of asset- (27600-25500)-$2,100 needs to be recognized 51 52 5) 53 54 JOURNAL ENTRY 56 Date Account Debit Credit 57 Sep-01 Land $120,000 $420,000 58 59 60 Building Contribution revenue $540,000