Question

On December 31, 2018 Change Co. showed the following account balances in his general ledger. Land $330,000 Building and plant facilities 990,000 Machinery and equipment 975,000 During 2019, the following transactions occurred. Land site A was acquired for $650,000 plus legal fees on closing of $40,000. Land site B, with a building, was acquired for $720,000. The closing statement indicated that the land value was $500,000 and the building value was $300,000. Shortly after acquisition, the building was removed and sold to a third party for $50,000. A new building was constructed for $460,000, plus the following costs: Architectural design fees $45,000 Excavation fees 58,000 Imputed interest on company funds 25,000 The imputed interest represents the amount of interest that the company would have paid if it had borrowed money to construct the building. The building was completed and occupied at the end of November 2019. A group of machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machine was $147,000, freight costs were $4,000, and royalty payments for 2019 were $12,000. Required: Prepare a schedule to determine the balance in each of the following balance sheet accounts at December 31, 2019: Land [3.5 marks] Building and plant facilities [2.5 marks] Machinery and equipment [2 marks] Disregard the related accumulate depreciation amounts. b. List the item(s) in the problem that were not included in the accounts listed in part (a). Indicate where, or if, these items should be included in the company’s 2019 financial statements. [1 mark]

Answer 1

PART – a)

The schedule for the computation of the closing balance of land, building and machinery is prepared as follows:

Machinery and equipment $975,000 Computation of balance on 31st December 2019 Building and 2 Particulars Land plant facilities 3 Balance on 31st Dec, 2018 $330,000 $990,000 4 Add: Acquisition cost of land at Site A $650,000 5 Add: Legal fees $40,000 6 Add: FV of land acquired at Site B $500,000 7 Add: FV of building at site B $300,000 8 Less: Carrying value of the building removed ($300,000) 9 Add: Construction of new building $460,000 10 Add: Fees of architectural design $45,000 11 Add: Excavation fees $58,000 12 Add: Invoice price of the machine 13 Add: Freight cost of machine 14 Balance on 31st Dec, 2019 $1,520,000 $1,553,000 15 $147,000 $4,000 $1,126,000

PART – b)

The items that were not included in PART – a are as follows:

(I). Imputed interest on company funds = It is provided of $25,000 incurred for construction of new building but it will not be capitalized as imputed interest is a notional cost i.e. it is the cost that would be paid by the business firm only if the money is borrowed and hence would not be shown in the account.

(II). Royalty payment = It is not the part of the machinery cost and hence the firm should expense such item instead of capitalizing it. The business firm should debit the cost of $12,000 as royalty expense in the profit and loss A/c.