Reference no: EM132877898
Problem - Allocate 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 ceramic business. The receipts are identified by an asterisk.
a. Fee paid to attorney for title search $ 3,000
b. Cost of real estate acquired as a plant site: Land 320,000 Building 30,000
c. Special assessment paid to city for extension of water main to the property 18,000
d. Cost of razing and removing building 5,000
e. Proceeds from sale of salvage materials from old building 3,000*
f. Delinquent real estate taxes on property, assumed by purchaser 12,000
g. Premium on one-year insurance policy during construction 4,200
h. Cost of filling and grading land 17,500
i. Architect's and engineer's fees for plans and supervision 44,000
j. Money borrowed to pay building contractor 750,000*
k. Cost of repairing windstorm damage during construction 5,500
l. Cost of paving parking lot to be used by customers 15,000
m. Cost of trees and shrubbery planted 9,000
n. Cost of floodlights installed on parking lot 1,000
o. Cost of repairing vandalism damage during construction 2,500
p. Proceeds from insurance company for windstorm and vandalism damage 6,000*
q. Payment to building contractor for new building 800,000
r. Interest incurred on building loan during construction 37,500
s. Refund of premium on insurance policy (g) canceled after 11 months 350*
Required -
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 income statement and balance sheet if the cost of filling and grading land of $17,500 [payment (h)] was incorrectly classified as Land Improvements rather than Land? Assume Land Improvements are depreciated over a 20-year life using the double-declining-balance method.