Exam 8: Property, Plant, and Equipment

Seally Corp. owns a machine that it purchased on Jan 1, 2010 for $600,000. The machine had an estimated useful life of 10 years and an estimated residual value of $100,000. The company uses the declining balance method with a rate of 20%. The machine was sold on December 31, 2012 for $140,000. What was the depreciation expense for 2011?

In December 2013, Bea, the owner of Walnut Corp, paid for a parcel of land along with a warehouse on behalf of Walnut, the registered owner of the property, for a total cost of $1,500,000. Bea also paid a real estate commission of $40,000 and legal fees of $10,000 in connection with this purchase, plus $30,000 for the demolition of the warehouse. Walnut will reimburse Bea for these costs in January 2014 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $900,000 and $600,000, respectively. On December 31, 2013, Walnut Corp and Teak Corp. exchanged equipment. The exchange met the test for commercial substance for accounting purposes. Details of the carrying values and fair values of the equipment on the date of the exchange were as follows: On October 1, 2013, Walnut purchased some land by signing a three-year non-interest-bearing note payable for $500,000. Walnut pays interest at the rate of 12% on other loans and was pleased to get a non-interest-bearing note payable on this deal. Required: Prepare the required journal entries for these transactions, as well as any related year-end adjustments. Ignore income taxes. Round all values to the nearest dollar, if necessary.

Discuss how inappropriate capitalization of costs during the acquisition of PPE can manipulate earnings.

In December 2012, Ami, the owner of Elm, paid for a parcel of land along with a warehouse on behalf of Elm, the registered owner of the property, for a total cost of $700,000. Ami also paid a real estate commission of $35,000 and legal fees of $5,000 in connection with this purchase, plus $25,000 for the demolition of the warehouse. Elm will reimburse Ami for these costs in January 2013 and will begin construction of an office building on this land. Prior to the purchase, the land and warehouse were appraised at $500,000 and $200,000, respectively. How much should be capitalized to the value of the building in 2012?

Rene exchanged similar assets with Simone Company in a transaction with commercial substance. Rene gave up equipment that had a net book value of $47,000 (fair value $49,000)and Simone exchanged equipment with a net book value of $36,000 (fair value $35,000). What is the correct value at which Simone should record the new equipment?

On January 1, 2011, a machine was purchased for $12,000. The machine was estimated to have a 10 year useful life and a residual value of $500. Straight-line depreciation is to be used. On January 1, 2013, the machine was then exchanged for computer equipment with a fair value of $10,000. Assuming that the exchange had commercial substance, how much would be recorded as a gain on disposal of the machine on January 1, 2013?

What costs should not be capitalized to "equipment"?

Every three years a major component (part #45)in a machine must be replaced. By doing this regular but expensive repair the machine can be used for 15 years. If Part #45 were not replaced, the machine could be used only for a maximum of six years. When the machine was originally purchased for $5,000,000 it was set up as one asset and depreciated over its estimated useful life of 15 years. Recently this repair was completed at a cost of $700,000 for Part #45. The earlier Part #45 cost $550,000 when it was installed three years ago. Neither the old nor the new Part #45 has any residual value. Prepare the necessary journal entry to record the transaction. Provide a short justification for your chosen treatment.

A building costing $7,000,000 was purchased on January 1, 2011. Based on management's best estimates, the useful life of the building was estimated to be 40 years, with no residual value. During 2017 it was discovered that the local government had plans to build a freeway where the building stands. This project would require significant engineering and regulatory approval, so the site would be expropriated by January 1, 2023. The government agreed to pay $320,000 compensation for the building. The company has a December 31 year-end. Required: Case A: Prepare the journal entries to record depreciation for 2011 and 2017. The company uses straight-line depreciation. Case B: Same as Case A except the company uses the double-declining balance method. The rate will be 5% until 2017 and 2/6 or 33.33% thereafter. Prepare the journal entries to record depreciation for 2011 and 2017.

What is the accounting treatment recommended under IFRS for interest capitalization for property, plant and equipment (PPE)?

Gigantic Corp acquired a machine from Miko Company in exchange for 10,000 Gigantic common shares, for which the quoted market price on the stock exchange was $20 per share. The machine was estimated by Gigantic to have a fair market value of $225,000. (Assume that the market price of the shares and the fair value of the machine are equally reliable.)The book value of the machine in Miko's records was $190,000. At what amount should Gigantic record the machine?

Which question must be considered at the initial recognition of property, plant and equipment?

How should $45,000 spent to obtain greater productive efficiency for a machine with a carrying value of $80,000 be accounted for?

CeeMore owns a machine that it purchased on Jan 1, 2010 for $400,000. The machine had an estimated useful life of 10 years and a production capacity of 80,000 units and was expected to have no residual value. The company uses the units-of-production method to record depreciation. The machine produced 15,000 units in 2010, 18,000 units in 2011 and 25,000 units in 2012. The machine was sold on December 31, 2012 for $350,000. What was the accumulated depreciation at the end of 2011?

Using the conceptual framework, explain why there is a difference between IFRS and ASPE in accounting for interest capitalization for property, plant and equipment.

At December 31, 2012, the following data were available for a building owned by Omega Company: A small room was built on the back of the building at a cost of $45,000. The room was completed on June 30, 2013 and was used as office space commencing July 2, 2013. The company uses straight-line depreciation, and accounts for partial years using the number of months the asset is available for use. Required: How much is the impact of this expenditure on income before taxes for 2013?

AccountingPro purchased equipment on January 1, 2009 for $275,000. The asset's useful life was estimated at 5 years or 10,000 units of output, with no residual value. The company has a December 31 year end. Additional Information Assuming the company uses the units-of-production depreciation method, what is the depreciation rate per unit for 2013?

What is a monetary item?

Polar Sky Railway (PSR), a transportation company, has substantial investments in property, plant, and equipment. In 2011, the company exchanged some of these assets with other companies. [Note: any depreciation expense prior to the following transaction has already been properly recorded.] PSR transported some luxury automobiles from the port in Vancouver to Winnipeg "for free." The company does not usually transport cars on this route, so a fair value was not determinable. However, there were negligible incremental costs because doing this involved simply attaching a few extra railcars to an existing train bound for Winnipeg. For doing this, PSR received two luxury cars, which the company awarded to executives as perquisites (perks). These cars had a retail value totaling $450,000. Required: Record the journal entry for the above transaction on PSR's books. State your reason(s)for the chosen accounting method.

Steep Mountain Ski Resort has been granted a 20-year permit to develop and operate a snow skiing operation in a national park. After 20 years the site must be returned to its original condition. The roads may remain, as they can be used for fire prevention purposes. In the spring and summer before the ski hill opened, the following transactions and events occurred: i. Installed three ski lifts for a total cost of $120,000,000. ii. Built a ski chalet for $60,000,000. iii. Removed trees and cleared the area for ski runs at a cost of $20,000,000. iv. Received $8,000,000 for the trees that were removed for the ski runs. v. Put in roads for a cost of $68,000,000. vi. Paved an area at the base of the mountain for a parking lot at a cost of $11,000,000. vii. Estimated that it would cost $36,000,000 to dismantle the ski lifts in 20 years but that these lifts could be sold as scrap steel for $2,000,000. The chalet could be removed for $24,000,000. Reforesting the site would cost $7,000,000. Removing the parking lot will cost $3,800,000. Required: a. Prepare journal entries to record transactions i. to vi. b. Prepare a journal entry to record transaction vii. Assume all these costs will be set up in a single account called "site restoration cost." Assume a 6% discount rate. Round to the nearest dollar. c. Record all year-end journal entries for the above items for the first year of operations. The company uses straight-line depreciation for all assets. Round to the nearest dollar.