Chapter 13, Problem 40ITC

 You are reviewing the property, plant, and equipment working papers of Mandville Corporation, a company that publishes travel guides. The lead schedule for the account is included in the chapter as Figure 13.1. The following are among the findings relating to changes in the account:

1.    Land: The addition represents the purchase of land adjacent to the company’s existing plant and is financed as follows:

  On June 17, the date on which the buyer and seller discussed the transaction, shares of Mandville Corporation stock were selling for $77.50. On June 30, the settlement date (day of the sale), Mandville stock was selling for $70.00 per share. The journal entry for the purchase was recorded as:

  Examination of publicly available records has indicated that prices of comparable land in the area have been relatively constant, selling in a range from $140,000 to $160,000 during the past 18 months.

2.    Land improvements: This account was increased by three journal entries (each recorded with a debit to land improvements and a credit to cash) during the year. Each of these improvements relates to the new land that was purchased in point (1) above.

3.    Building: The building was constructed by an independent contractor; the contract was for $473,000. Progress payments were made during construction through use of proceeds of a bank loan, for which the building serves as collateral. The interest during construction was capitalized ($22,000), while the interest subsequent to construction but prior to year-end ($20,000) was expensed.

4.    Equipment: The change in the equipment was a trade of old book “update printing equipment” for two new computer servers and associated software that will maintain electronic updates. Until recently, updates of outdated portions of guidebooks were printed and “shrinkwrapped” with the guidebook. Now the updates will be available on Mandville’s website. The old equipment had a cost of $60,000 and accumulated depreciation of $50,600 and was worth approximately its book value of $9,400, although the salesperson suggested that he was providing the company a $19,400 trade-in value. Accordingly, the following entry was made to record the exchange:

5.    Depreciation provisions: Mandville uses software to calculate depreciation to the exact day.

Required:

1. a.   For additions (1) through (4) above, prepare any necessary adjusting entries. If in any case your adjusting entry relies upon an assumption, provide that assumption.
2. b.   For item (5), prepare a calculation of the depreciation provisions and determine whether they appear reasonable. For this calculation, assume that acquisitions, on average, occur at mid-year. If the provision does not appear reasonable, discuss follow-up procedures related to the provisions. Use the following table for your calculation: