Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009

P10-2 (Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009, had the following balances.

Land $ 300,000
Land improvements 140,000
Buildings 1,100,000
Machinery and equipment 960,000

During 2010 the following transactions occurred.
1. A tract of land was acquired for $150,000 as a potential future building site.
2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000.
3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows.
Freight and unloading $13,000
Sales taxes 20,000
Installation 26,000
4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
5. A machine costing $80,000 on January 1, 2002, was scrapped on June 30, 2010. Double-declining balance depreciation has been recorded on the basis of a 10-year life.
6. A machine was sold for $20,000 on July 1, 2010. Original cost of the machine was $44,000 on January 1, 2007, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000.

Instructions
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2010.
Land
Land improvements
Buildings
Machinery and equipment
(Hint: Disregard the related accumulated depreciation accounts.)

(b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.
(AICPA adapted)

Click here for the solution: Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2009

At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet

P10-1 (Classification of Acquisition and Other Asset Costs) At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet had the following balances.

Land $230,000
Buildings 890,000
Leasehold improvements 660,000
Machinery and equipment 875,000

During 2010 the following transactions occurred.
1. Land site number 621 was acquired for $850,000. In addition, to acquire the land Reagan paid a $51,000 commission to a real estate agent. Costs of $35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for $13,000.

2. A second tract of land (site number 622) with a building was acquired for $420,000. The closing statement indicated that the land value was $300,000 and the building value was $120,000. Shortly after acquisition, the building was demolished at a cost of $41,000. A new building was constructed for $330,000 plus the following costs.

Excavation fees $38,000
Architectural design fees 11,000
Building permit fee 2,500
Imputed interest on funds used during construction (stock financing) 8,500

The building was completed and occupied on September 30, 2010.

3. A third tract of land (site number 623) was acquired for $650,000 and was put on the market for resale.

4. During December 2010 costs of $89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2012, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)

5. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was $87,000, freight costs were $3,300, installation costs were $2,400, and royalty payments for 2010 were $17,500.

Instructions
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2010.

Land Leasehold improvements
Buildings Machinery and equipment

Disregard the related accumulated depreciation accounts.

(b) List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan's financial statements.

Click here for the solution: At December 31, 2009, certain accounts included in the property, plant, and equipment section of Reagan Company's balance sheet

What are the major elements of an internal control over property, plant, and equipment?

What are the major elements of an internal control over property, plant, and equipment? For the specific control procedures identified, indicate their importance to the audit.


Click here for the solution: What are the major elements of an internal control over property, plant, and equipment?

Mike purchases a heavy-duty truck (5-year class recovery property) for his delivery service on April 30, 2010

Mike purchases a heavy-duty truck (5-year class recovery property) for his delivery service on April 30, 2010. The truck is not considered a passenger automobile for purposes of the listed property and luxury automobile limitations. The truck has a depreciable basis of $39,080 and an estimated useful life of 5 years. Its estimated salvage value is $1,080. Assume no election to expense is made and no bonus depreciation is taken.

a. Calculate the amount of depreciation for 2010 using financial accounting straight-line depreciation (not the straight-line MACRS election) over the truck's estimated useful life.
b. Calculate the amount of depreciation for 2010 using the straight-line depreciation election under MACRS over the minimum number of years.
c. Calculate the amount of accelerated depreciation for 2010 that Mike could deduct using MACRS.


Click here for the solution: Mike purchases a heavy-duty truck (5-year class recovery property) for his delivery service on April 30, 2010

William sold Section 1245 property for $25,000 in 2010

William sold Section 1245 property for $25,000 in 2010. The property cost $35,000 when it was purchased 5 years ago. The depreciation claimed on the property was $16,000.
a. Calculate the adjusted basis of the property.
b. Calculate the recomputed basis of the property.
c. Calculate the amount of ordinary income under Section 1245.
d. Calculate the Section 1231 gain.


Click here for the solution: William sold Section 1245 property for $25,000 in 2010

Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock

C:2-44. Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock worth $15,000 and Emerald’s assumption of a $35,000 mortgage on the property.

a. What is the amount of Jerry’s recognized gain or loss?
b. What is Jerry’s basis in the Emerald stock?
c. What is Emerald’s basis in the property?
d. How would your answers to Parts a through c change if the mortgage assumed by Emerald were $15,000 and the Emerald stock were worth $35,000?


Click here for the solution: Jerry transfers property having a $32,000 adjusted basis and a $50,000 FMV to Emerald Corporation in exchange for all of Emerald’s stock

Using the information from Problem 47, determine the basis of the property contributed in the hands of the corporation in each instance

48. Using the information from Problem 47, determine the basis of the property contributed in the hands of the corporation in each instance. Assume that the 80% rule is met in all cases.


Click here for the solution: Using the information from Problem 47, determine the basis of the property contributed in the hands of the corporation in each instance

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church

Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church. Pernal sent a letter to the church indicating that he was offering it for sale for “$825,000 cash/mortgage ‘as is,’ with no conditions, no contingencies related to zoning and 120 days post closing occupancy for the present tenants.” This offer was dated June 3, 2003, and expressly provided that it would remain open for a two-week period. On the same day, Pernal also sent the same offer to sell the property on the same terms to another prospective purchaser, White Chapel Memorial Association Park Perpetual Care Trust. On June 4, the church sent a letter indicating that it accepted the terms of the offer that Pernal had set forth in his letter. However, the church’s letter also referenced an attached purchase agreement. The purchase agreement agreed with Pernal’s purchase price and the close occupancy period, but contrary to the offer, it contained additional terms. The church’s president signed this attached purchase agreement, but defendant did not sign it. The offer by letter dated June 3, 2003, did not reference other potential purchasers. On June 10, White Chapel, by letter, offered to pay $900,000 cash for the property, with no conditions or contingencies related to zoning and 180 days post closing occupancy rent free. On that same date (June 10), Pernal sent a letter to both potential purchasers. This letter indicated that “amended offers” had been received. The letter further provided that the offer would remain open for two weeks’ time as provided in the initial offering letter. On June 13, the church sent a letter to Pernal, stating that the offer had been accepted on June 4, and that an enforceable contract was formed. The church sued Pernal for breach of contract. Will it win?

Click here for the solution: Pernal owned a parcel of real estate adjacent to property owned by St. Nicholas Greek Orthodox Church