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Chapter 7: Long-Lived Nonmonetary Assets and Their Ammortization

Case: Joan Holtz

Reference: Accounting Text and Cases (9th Ed)

Joan Holtz said to the accounting instructor. "The general principle for arriving at the amount
of a fixed asset that is to be capitalized is reasonably clear, but there certainly are a great many
problems in applying this principle to specific situations."

1. Suppose that the Bruce Manufacturing Company used its own maintenance crew to build an additional
additional wing on its existing factory building. What would be the proper accounting treatment of the following
items (items a-i)?

Solution: Note --- amount shown is not given in the question

Architects' fee $ 1,200
Snow removal cost $ 1,300
Removal of old building $ 20,000
Interest payable on construction $ 2,500
Local real estate taxes $ 2,000
Cost of mistakes during construction $ 3,000
Accumulated overhead cost $ 25,000
Insurance on building construction $ 6,500
Other cost of damages or loses during construction $ 3,500 $ 65,000
Less: Cash discounts $ 2,000
$ 63,000

Cash $ 63,000.00

2) Assume that the Archer Company bought a large piece of land, including the buildings thereon,
with the intent of razing the buildings and constructing a combined hotel and office building in their
place. The existing buildings consisted of a theater and several stores and small apartment buildings,
all in active use at the time of the purchase.

a) What accounting treatment should be accorded that portionof the purchase price considered to be amount
paid for the buildings that are subsequently razed?

Land and Building

Cash paid for land and building $ 3,000,000

Cash $ 3,000,000

b) How should the costs of demolishing the old buildings be treated?

Removal of old building $ 250,000

Cash $ 250,000



c) In what respect, if any, should the accounting treatment of the old buildings and the cost of demolishing them differ from your
recommendations with respect to (a) and (b) above? Why?

Cash paid for land and building $ 3,000,000
Removal of old building $ 250,000
New building constructed $ 1,500,000 $ 4,750,000

Cash $ 4,750,000

3) Midland Manufacturing company purchased a new machine. It is clear that the invoice price of the new machine should be capitalized,
and it also seems reasonable to capitalize the transportation cost to bring the machine to the Mindland plant.

a) Should this cost be charged to the building, added to the cost of the machine or be expensed? Why?

Installation of additional steal beams cost should be charged to the cost of the machine --- "Cost of Installation", because the
equipment as mentioned above should be capitalized. The cost incurred to install the new machine, therefore it is a cost
requirement for machine to get ready for operation.

b) Before the new machine was working properly, a large amount of material had been spoiled during trial runs. How should all of these
costs be treated? Why?

Regular installation maintenance crew, engineer, plant superintendednt labor cost and other labor costs incurred
and materials spoiled during the trial runs, all these cost should be charged to the cost of the machine, because all these costs
incurred to get the new machine ready for operation.

c) Is state sales tax on purchasing the machine part of the machine's cost? Why?

Yes, state sales tax and other taxes that may incur to purchase the machine would be part of the machine costs.

d) Should trade-in gain be treated as a reduction in the cost of the new machine or a gain disposal of the old one? Why?

The difference between the trade-in value and the depreciated value of the old machine should be treated as deduction to the
cost of the new machine because accepting Midland Company's old machine as partial payment is trading old asset to
a similar new asset. And the value of the old asset is used in calculating the acquisition cost of the new asset.