Chapter 10, Problem 7E

1.

To determine

Identify the cost assigned to land, buildings, and equipment.

Explanation of Solution

Determination of cost:

The procurement or acquisition cost of “property, plant and equipment” comprises of all costs that are required to obtain the benefits to be derived from the asset.

Calculate the cost assigned to land:

$\begin{array}{c}\text{Cost}\text{assigned}\text{to}\text{land}\text{=}\text{Total}\text{cost}\text{×}\text{Pecentage}\text{of}\text{appraisal}\\ \text{=\$220,000}\text{(4)×40\%}\text{(1)}\\ \text{=\$88,000}\end{array}$

Therefore, the cost assigned to land is $88,000.

Calculate the cost assigned to building:

$\begin{array}{c}\text{Cost}\text{assigned}\text{to}\text{building}\text{=}\text{Total}\text{cost}\text{×}\text{Pecentage}\text{of}\text{appraisal}\\ \text{=\$220,000}\text{(4)×50\%(2)}\\ \text{=\$110,000}\end{array}$

Therefore, the cost assigned to building is $110,000.

Calculate the cost assigned to equipment:

$\begin{array}{c}\text{Cost}\text{assigned}\text{to}\text{equipment}\text{=}\text{Total}\text{cost}\text{×}\text{Pecentage}\text{of}\text{appraisal}\\ \text{=\$220,000}\text{(4)×10\%(3)}\\ \text{=\$22,000}\end{array}$

Therefore, the cost assigned to equipment is $22,000.

Working notes:

(1) Calculate the percentage of appraisal for land:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\\ \text{appraisal}\text{for}\text{land}\end{array}\}\text{=}\frac{\text{Appraisal}\text{value}\text{of}\text{land}}{\text{Total}\text{appraisal}\text{value}}\text{×100}\\ \text{=}\frac{\text{\$100,000}}{\text{\$250,000}}\text{×100}\\ \text{=40\%}\end{array}$

(2) Calculate the percentage of appraisal for building:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{appraisal}\\ \text{for}\text{building}\end{array}\}\text{=}\frac{\text{Appraisal}\text{value}\text{of}\text{building}}{\text{Total}\text{appraisal}\text{value}}\text{×100}\\ \text{=}\frac{\text{\$125,000}}{\text{\$250,000}}\text{×100}\\ \text{=50\%}\end{array}$

(3) Calculate the percentage of appraisal for equipment:

$\begin{array}{c}\begin{array}{l}\text{Percentage}\text{of}\text{appraisal}\\ \text{for}\text{equipment}\end{array}\}\text{=}\frac{\text{Appraisal}\text{value}\text{of}\text{equipment}}{\text{Total}\text{appraisal}\text{value}}\text{×100}\\ \text{=}\frac{\text{\$25,000}}{\text{\$250,000}}\text{×100}\\ \text{=10\%}\end{array}$

(4) Calculate the amount of total cost:

Acquisition cost	$200,000
Appraisal	$20,000
Total cost	$220,000

Table (1)

2.

To determine

Journalize entries to value property, plant and equipment of Corporation G.

Explanation of Solution

Property, Plant, and Equipment:

Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.

Journal entry:

Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Accounting rules for Journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains

Prepare journal entry with regard to land and to recognize the increase in fair value of land:

Date	Account titles and explanation	Debit ($)	Credit ($)
	Land $\text{(\$100,000}-\text{\$88,000)}$	22,000
	Revaluation surplus		22,000
	(To record the fair value of land)

Table (2)

• Land is an asset and it is increased. Therefore, debit land account by $22,000.
• Revaluation surplus is a component of stockholders’ equity and it is decreased. Therefore, debit revaluation surplus account by $22,000.

Prepare journal entry with regard to buildings:

Date	Account titles and explanation	Debit ($)	Credit ($)
	Accumulated depreciation (5)	6,000
	Building		6,000
	(To record the depreciation for building)

Table (3)

• Accumulated depreciation is a contra asset account and it is decreased. Therefore, debit accumulated depreciation account by $6,000.
• Building is an asset and it is decreased. Therefore, credit building account by $6,000.

Prepare journal entry to record the increase in value of building:

Date	Account titles and explanation	Debit ($)	Credit ($)
	Building (6)	2,000
	Revaluation surplus		2,000
	(To record the increase in value of building)

Table (4)

• Building is an asset and it is increased. Therefore, debit building account by $2,000.
• Revaluation surplus is a component of stockholders’ equity and it is increased. Therefore, credit revaluation surplus account by $2,000.

Prepare journal entry with regard to equipment and record the decrease in the value of equipment:

Date	Account titles and explanation	Debit ($)	Credit ($)
	Loss on impairment (7)	3,000
	Equipment		3,000
	(To record the decrease in value of equipment)

Table (5)

• Loss on impairment is a component of stockholders’ equity and it is decreased. Therefore, debit loss on impairment account by $3,000.
• Equipment is an asset and it is decreased. Therefore, credit equipment account by $3,000.

Working notes:

(5) Calculate accumulated depreciation:

$\begin{array}{c}\begin{array}{l}\text{Accumulated}\\ \text{depreciation}\end{array}\}\text{=Original}\text{cost}-\text{Book}\text{value}\text{of}\text{building}\\ \text{=\$110,000}-\text{\$104,000}\\ \text{=\$6,000}\end{array}$

(6) Calculate the increase in value of building:

$\begin{array}{c}\begin{array}{l}\text{Increase}\text{in}\text{value}\\ \text{of}\text{building}\end{array}\}\text{=}\text{Fair}\text{value}\text{of}\text{building}-\text{Book}\text{value}\text{of}\text{building}\\ \text{=\$106,000}-\text{\$104,000}\\ \text{=\$2,000}\end{array}$

(7) Calculate the decrease in value of equipment:

$\begin{array}{c}\begin{array}{l}\text{Decrease}\text{in}\text{value}\\ \text{of}\text{equipment}\end{array}\}\text{=}\text{Book}\text{value}\text{of}\text{equipment}-\text{Fair}\text{value}\text{of}\text{equipment}\\ \text{=\$18,000}-\text{\$15,000}\\ \text{=\$3,000}\end{array}$