Kofkans company limited purchased land as a factory site and contracted with Maxtor Construction to construct a factory.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Kofkans company limited purchased land as a factory site and contracted with Maxtor Construction to construct a factory. Kofkans made the following expenditures related to the acquisition of the land, building, and equipment for the factory.
GHC
Purchase price of land 1,200,000
Demolition and removal of old building 80,000
Clearing and grading the land before construction 150,000
Various closing costs in connection with acquiring land 42,000
Architect’s fee for the plans for the new building 50,000
Payments to Maxtor for building construction 3,250,000
Equipment purchased 860,000
Freight charges on equipment 32,000
Trees, plants and other landscaping 45,000
Installation of a sprinkler system for landscaping 5,000
Cost to build special platforms and install wiring for the equipment 12,000
Cost of trial runs to ensure proper installation of the equipment 7,000
Fire and theft insurance on the factory for the first year of use 24,000
Determine the initial valuation of each of the assets Teradene acquired in the above transactions. Land Factory building Equipment
And also if Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase price was Ghc900,000. According to independent appraisals, the fair values were Ghc450,000 (building A) and Ghc250,000 (building B) for the buildings and Ghc300,000 for the land. Determine the initial valuation of the buildings and the land?
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