Exam 8: Property, Plant and Equipment

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

In December 2021, 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 2021 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 2021?

Grape Company (GC)had been renting an office building for several years. On January 1, 2019, GC decided to have a new office building constructed. On that date, it acquired land with an abandoned warehouse on it for $350,000. Other costs included the following: Demolition of warehouse \ 18,000 Legal fees for purchase of land 3,300 Construction costs of new building 686,000 Proceeds from salvage of warehouse materials 6,000 Installation of wiring and plumbing fixtures 13,000 Architectural fees 21,000 Required: a. Calculate at what amount GC should record the (i)land and (ii)building. b. Assume that the building was completed and occupied on December 31, 2019. It has an estimated useful life of 40 years, with residual value of $140,000. Calculate depreciation for 2020 using (i)the straight-line method and (ii)the double declining balance method. c. Assume that management decided to use straight-line depreciation for the building. By 2023 GC had grown considerably and needed to relocate for more space; it sold the land and building to Macaw Company on July 1, 2023 for $1,350,000. Assume depreciation expense has already been recorded for the first six months of the year (Jan. 1, 2023 to June 30, 2023). Prepare all journal entries required relating to the land and building accounts on July 1, 2023.

Billu Limited purchased equipment on January 1, 2019 for $275,000. It was estimated that the equipment would have a residual value of $25,000 at the end of its useful life. The asset's useful life was estimated at 5 years or 10,000 units of output. The company has a December 31 year end. Additional information: Year Units of Output 2019 2,100 2020 2,000 2021 1,700 022 2,300 2023 1,900 Assuming the company uses the units-of-production depreciation method, calculate the depreciation expense for 2022.

Ontario Ltd. owns a machine that it purchased on Jan 1, 2019 for $750,000. The machine had an estimated useful life of 5 years and an estimated residual value of $50,000. The company uses straight-line depreciation and records monthly depreciation. The machine was sold on December 31, 2022 for $200,000. What was the annual depreciation expense?

On March 1, 2019, Pear Company (PC)had been renting its office building for several years and decided to have a new office building constructed. On April 1, 2019, it acquired land with an abandoned warehouse on it for $100,000. Other costs included: Demolition of warehouse 20,000 Legal fees for purchase of land 2,400 Construction costs of new building 400,000 Proceeds from salvage of warehouse materials 4,000 Installation of wiring and plumbing fixtures 16,000 Architectural fees 24,000 How much will be capitalized to "land" in fiscal 2019?

Explain how non-monetary transactions are accounted for.

Daniel Manufacturing Limited (DML)purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000. Required: For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses.

On April 1, 2019, Omega Company paid $15,000 for office furniture. The furniture is expected to last 10 years with no residual value. Omega uses the double declining balance method of depreciation and fractional-year depreciation based on the number of months. Required: What is the depreciation expense for the year ended December 31, 2019?

What costs should be capitalized to "land"?

Explain why earnings manipulation of property, plant and equipment can have long-lasting impact on the financial statements.

At December 31, 2021, the following data were available for a building owned by Omega Company: Building cost \ 700,000 Accumulated depreciation - building 525,000 Estimated residual value at end of the useful life 25,000 Estimated remaining useful life 15 A small room was built on the back of the building at a cost of $45,000. The room was completed on June 30, 2022 and was used as office space commencing July 2, 2022. 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 2022?

On January 1, 2019, BigBen purchased a machine, incurring the expenditures listed below. The machine had an estimated useful life of 10 years, and BigBen uses straight-line depreciation for its equipment. Invoice cost of machine \ 100,000 Shipping costs paid 15,000 Preparing concrete platform to support machine 10,000 Testing of machine prior to general use 30,000 What amount should be capitalized as the cost of the machinery for 2019?

What is the IFRS treatment for replacements versus repairs?

Explain why it is necessary to separate property, plant and equipment (PPE)items into separate components.

What is a monetary item?

What is the meaning of "historical cost"?

Forest Company paid $38,000,000 for a warehouse and related assets from a company that was in bankruptcy. The warehouse includes land, building, moving equipment, and heating/ventilation/air conditioning (HVAC)system. An independent appraiser valued these items individually as follows: PPE category Appraised value Land \ 10,400,000 Building 23,400,000 Moving equipment 3,900,000 HVAC system Total Required: Allocate the purchase price among the assets acquired.

On January 1, 2020, 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, 2022, 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, 2022?

Explain derecognition of property, plant or equipment.