E10-2 (LO1) Acquisition Costs of Realty

Martin Buber Co. tore down two old buildings on land it purchased as a factory site. The process of
tearing down and constructing the factory required 6 months. The company incurred the following
costs and acquisitions during the year:

Purchased land as a factory site $ 400,000

Payment to raze old buildings 42,000
Sale of salvaged lumber and brick from razing 6,300
Legal fees paid for title investigation and drawing the purchase contract 1,850
Payment to an engineering firm for a land survey 2,200
(Survey had to be made before definitive plans could be drawn.)
Payment for drawing the factory plans 68,000
Title insurance on the property 1,500
Liability insurance premium during construction 900
Contractor’s charge for construction 2,740,000
Payment to the contractor - first installment @ end of 3 months 1,200,000
Payment to the contractor - second installment upon completion 1,540,000
Interest costs incurred to finance the construction 170,000

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

Land Building
E10-3 (LO1) Acquisition Costs of Trucks
Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to
customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition
for each truck are described below.

1. Truck #1
List price $ 15,000
Cash acquisition cost 13,900
2. Truck #2
List price $ 16,000
Acquisition cost
Cash down payment 2,000
Face amount of zero-interest bearing note assumed 14,000
Note due date April 1, 2018
Normal interest rate for this borrowing 10%
Incremental borrowing rate 8%
3. Truck #3
List price $ 16,000
Acquired in exchange for a computer system that Clarkson carries in
inventory
Cost of computer system in inventory 12,000
Normal selling price of computer system by Clarkson 15,200
Inventory system used by Clarkson Perpetual
4. Truck #4
List price $ 14,000
Acquired in exchange for common stock in Clarkson Corporation 1,000 shares
Par value of common stock per share $ 10.00
Market value of common stock per share $ 13.00

Instructions:
Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.

Debit Credit
1

2 Hint: Use the Excel Present Value formula.

3

4
P10-1 (LO1) Classification of Acquisition and Other Asset Costs
At December 31, 2016, 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 2017, the following transactions occurred:

1. Cost of land site number 621 acquired $ 850,000
Commission to a real estate agent to acquire land 51,000
Cost of clearing land 35,000
Sale of timber and gravel that were recovered during the land clearing 13,000

2. Second tract of land (site number 622) with a building $ 420,000

Land value as indicated on the closing statement 300,000
Building value as indicated on the closing statement 120,000
Cost of demolition of the building shortly after acquisition 41,000
Cost of new building constructed 330,000
Additional costs of constructing building:
Excavation fees 38,000
Architectural design fees 11,000
Building permit fees 2,500
Imputed interest on funds used during construction (stock financing) 8,500
Completion and occupancy date of building Sept. 30, 2017

3. Acquisition of a third tract of land (site number 623) (Put on the market for resale) $ 650,000

4. Costs of improving leased office during December 2017. The related lease will $ 89,000
terminate on December 31, 2019, and is not expected to be renewed.
(Hint:Leasehold improvements should be handled in the same manner as land improvements.)

5. Purchase of a group of new machines under a royalty agreement that provides for
payment of royalties based on units of production for the machines
Invoice price of the machines $ 87,000
Freight costs 3,300
Installation costs 2,400
Royalty payments for 2017 17,500
(AICPA adapted)
Instructions:
(a) Prepare a detailed analysis of the changes in each of the following balance sheet accounts for
2017:
Land
Buildings
Leasehold Improvements
 Equipment
Disregard the related accumulated depreciation accounts.
 REAGAN COMPANY
Analysis of Land Account for 2017

REAGAN COMPANY
Analysis of Buildings Account for 2017

REAGAN COMPANY
Analysis of Leasehold Improvements Account for 2017
 REAGAN COMPANY
Analysis of Equipment Account for 2017

(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.
P10-5 (LO1,3) Classification of Costs and Interest Capitalization
During January, Blair Corporation incurred transactions provided below:

Purchase of a tract of land (site number 101) with a building on January 1, 2017 $ 500,000
Payment of real estate broker's commission 36,000
Legal fees 6,000
Title guarantee insurance 18,000
Land value indicated on the closing statement 500,000
Building value indicated on the closing statement 100,000
Cost to raze the building shortly after acquisition 54,000

Entered into a fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the
construction of an office building on land site number 101. The building was completed
and occupied on September 30, 2018. $ 3,000,000
Additional construction costs were incurred as follows:
Plans, specifications, and blueprints 21,000
Architects' fees for design and supervision 82,000

Estimated useful life of the building from date of completion 40 years

Depreciation method used for building 150% declining balance

Borrowing to finance construction costs on March 1, 2017 $ 3,000,000

Payment terms on loan:
Number of installment payments 10
Amount of each annual installment, plus interest, starting March 1, 2018 $ 300,000
Interest rate 10%

Weighted-average amounts of accumulated building construction expenditures:

For the period March 1 to December 31, 2017 $ 1,300,000
For the period January 1 to September 30, 2018 1,900,000
(AICPA adapted)

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, 2018.

(a) BLAIR CORPORATION

Cost of Land (Site #101)
As of September 30, 2018

(b) Prepare a schedule that discloses the individual costs that should be capitalized in the office
building account as of September 30, 2018.
Calculation of capitalized interest:

Interest to be capitalized:
2017
2018

Actual interest:
2017

2018

BLAIR CORPORATION
Cost of Building
As of September 30, 2018