Chapter 10, Problem 10.1BPR

Allocating payments and receipts to fixed asset accounts

The following payments and receipts are related to land, land improvements, and buildings acquired for use in a wholesale apparel business. The receipts are identified by an asterisk.

a. Fee paid to attorney for title search	$ 3,600
b. Cost of real estate acquired as a plant site: Land	720,000
Building (to be demolished)	60,000
c. Finder’s fee paid to real estate agency	23,400
d. Delinquent real estate taxes on property, assumed by purchaser	15,000
e. Architect’s and engineer’s fees for plans for new building	75,000
f. Cost of removing building purchased with land in (b)	10,000
g. Proceeds from sale of salvage materials from old building	3,400*
h. Cost of filling and grading land	18,000
i. Premium on one-year insurance policy during construction.	8,400
j. Money borrowed to pay building contractor	800,000*
k. Special assessment paid to city for extension of water main to the property	13,400
1. Cost of repairing windstorm damage during construction	3,000
m. Cost of repairing vandalism damage during construction	2,000
n. Cost of trees and shrubbery planted	14,000
o. Cost of paving parking lot to be used by customers	21,600
p. Interest incurred on building loan during construction	40,000
q. Proceeds from insurance company for windstorm and vandalism damage	4,500*
r. Payment to building contractor for new building	800,000
s. Refund of premium on insurance policy (i) canceled after 10 months	1,400*

Instructions

1.    Assign each payment and receipt to Land (unlimited life), Land Improvements (limited life), Building, or Other Accounts. Indicate receipts by an asterisk. Identify each item by letter and list the amounts in columnar form, as follows:

Item

Land

Land Improvements

Building

Other Accounts

2.    Determine the amount debited to Land, Land Improvements, and Building.

3.    The costs assigned to the land, which is used as a plant site, will not be depreciated, while the costs assigned to land improvements will be depreciated. Explain this seemingly contradictory application of the concept of depreciation.

4.    What would be the effect on the current year’s income statement and balance sheet if the cost o f paving the parking lot o f $21,600 [payment (o)] was incorrectly classified as Land rather than Land Improvements? Assume that Land Improvements are depreciated over a 10-year life using the double-declining-balance method.