In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000

P11-7 Depletion; change in estimate

In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000. Additional costs of $600,000 were incurred to develop the mine. Geologists estimated that 400,000 tons of ore would be extracted. After the ore is removed, the land will have a resale value of $100,000.

To aid in the extraction, Marion built various structures and small storage buildings on the site at a cost of $150,000. These structures have a useful life of 10 years. The structures cannot be moved after the ore has been removed and will be left at the site. In addition, new equipment costing $80,000 was purchased and installed at the site. Marion does not plan to move the equipment to another site, but estimates that it can be sold at auction for $4,000 after the mining project is completed.

In 2011, 50,000 tons of ore was extracted and sold. In 2012, the estimate of total tons of ore in the mine was revised from 400,000 to 487,500. During 2012, 80,000 tons were extracted, of which 60,000 tons were sold.

1. Compute depletion and depreciation of the mine and the mining facilities and equipment for 2011 and 2012. Marion uses the units-of-production method to determine depreciation on mining facilities and equipment.
2. Compute the book value of the mineral mine, structures, and equipment as of December 31, 2012.
3. Discuss the accounting treatment of the depletion and depreciation on the mine and mining facilities and equipment.

Click here for the solution: In 2011, the Marion Company purchased land containing a mineral mine for $1,600,000

Smith and Jones each own tracts of land

Smith and Jones each own tracts of land. Because of the location of their current operations, each would prefer to have the other's land. Smith and Jones agree to exchange tracts. Jones pays Smith $36,000 based upon the following data.

Smith Land Jones Land
Original Cost $270,000 $280,000
Appraised fair value at date of exchange $300,000 $264,000

Instructions
(a) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction has commercial substance.
(b) Prepare the journal entry to record the exchange on Smith's books, assuming the transaction does not have commercial substance.
(c) Prepare the journal entry to record the exchange on Jones’s books, assuming the transaction has commercial substance.
(d) Prepare the journal entry to record the exchange on Jones’s books, assuming the transaction does not have commercial substance.

Click here for the solution: Smith and Jones each own tracts of land

On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000

BE 5-1 On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000. The book value of the land on Apache's books was $1,200,000. Terms of the sale required a down payment of $150,000 and 19 annual payments of $150,000 plus interest at an appropriate interest rate due on each July 1 beginning in 2012. Apache has no significant obligations to perform services after the sale. How much gross profit will Apache recognize in both 2011 and 2012 applying the cost recovery method?


Click here for the solution: On July 1, 2011, Apache Company sold a parcel of undeveloped land to a construction company for $3,000,000

Pollachek Co. purchased land as a factory site for $450,000

Pollachek Co. purchased land as a factory site for $450,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Pollachek paid $2,200 to an engineering firm for a land survey, and $65,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $1,500, and a liability insurance premium paid during construction was $900. The contractor’s charge for construction was $2,740,000. The company paid the contractor in two installments: $1,200,000 at the end of 3 months and $1,540,000 upon completion. Interest costs of $170,000 were incurred to finance the construction.

Determine the cost of the land and the cost of the building as they should be recorded on the books of Pollachek Co. Assume that the land survey was for the building.


Click here for the solution: Pollachek Co. purchased land as a factory site for $450,000

On April 1, 2012, Pavlova Company received a condemnation award of $410,000 cash as compensation for the forced sale of the company’s land and building

E10-25 (Disposition of Assets) On April 1, 2012, Pavlova Company received a condemnation award of $410,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost $60,000 and $280,000, respectively, when they were acquired. At April 1, 2012, the accumulated depreciation relating to the building amounted to $160,000. On August 1, 2012, Pavlova purchased a piece of replacement property for cash. The new land cost $90,000, and the new building cost $380,000.

Instructions
Prepare the journal entries to record the transactions on April 1 and August 1, 2012.


Click here for the solution: On April 1, 2012, Pavlova Company received a condemnation award of $410,000 cash as compensation for the forced sale of the company’s land and building

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits. In 2011, the partnership distributes this property to Isabel, also a 25% partner, in a no liquidating distribution. The fair market value has increased to $30,000 at the time the property is distributed. Isabel’s and Adrianna’s bases in their partnership interests are each $40,000 at the time of the distribution.

a. How much gain or loss, if any, does Adrianna recognize on the distribution to Isabel? What is Adrianna’s basis in her partnership interest following the distribution?
b. What is Isabel’s basis in the land she received in the distribution?
c. How much gain or loss, if any, does Isabel recognize on the distribution? What is Isabel’s basis in her partnership interest following the distribution?
d. How much gain or loss would Isabel recognize if she later sells the land for its $30,000 fair market value? Is this result equitable?
e. Would your answers to (a) and (b) change if Adrianna originally contributed the property to the partnership in 2000?

Click here for the solution: In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

On February 1, 2007, Reardon Corporation purchased a parcel of land as a factory site for $320,000

On February 1, 2007, Reardon Corporation purchased a parcel of land as a factory site for $320,000. An old building on the property was demolished and construction begun on a new warehouse that was completed April 15, 2008. Costs incurred on the construction project are listed below.

Demolition of old building $21,000
Architect's fees 31,700
Legal fees/title investigation 4,100
Construction costs 950,000
Imputed interest based on stock financing 14,000
Landfill for building site 19,300
Clearing of trees from the building site 9,600
Temporary buildings used for construction activities 29,000
Land survey 4,000
Excavation for basement 13,200
(Salvage materials from demolition sold for $1,800)
(Timber sold for $3,300)

Determine the cost of the land and new building.

Click here for the solution: On February 1, 2007, Reardon Corporation purchased a parcel of land as a factory site for $320,000

On January 1, 2010, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building

P10-5 (Classification of Costs and Interest Capitalization) On January 1, 2010, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker's commission of $36,000, legal fees of $6,000, and title guarantee insurance of $18,000. The closing statement indicated that the land value was $500,000 and the building value was $100,000. Shortly after acquisition, the building was razed at a cost of $54,000. Blair entered into a $3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2010, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2011. Additional construction costs were incurred as follows.

Plans, specifications, and blueprints $21,000
Architects' fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed $3,000,000 on March 1, 2010. The loan is payable in 10 annual installments of $300,000 plus interest at the rate of 10%. Blair's weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2010 $1,300,000
For the period January 1 to September 30, 2011 1,700,000

Instructions
a) Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2011.
b) Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2011.

Click here for the solution: On January 1, 2010, Blair Corporation purchased for $500,000 a tract of land (site number 101) with a building

Allegro Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment

E10-5 (Treatment of Various Costs) Allegro Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company’s fee for title search $ 520
Architect’s fees 3,170
Cash paid for land and dilapidated building thereon 92,000
Removal of old building $20,000
Less: Salvage 5,500 14,500
Interest on short-term loans during construction 7,400
Excavation before construction for basement 19,000
Machinery purchased (subject to 2% cash discount, which was not taken) 65,000
Freight on machinery purchased 1,340
Storage charges on machinery, necessitated by noncompletion of building when machinery was delivered 2,180
New building constructed (building construction took 6 months from date of purchase of land and old building) 485,000
Assessment by city for drainage project 1,600
Hauling charges for delivery of machinery from storage to new building 620
Installation of machinery 2,000
Trees, shrubs, and other landscaping after completion of building (permanent in nature) 5,400

Instructions
Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.

Click here for the solution: Allegro Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment