Kent Adamson Company is a manufacturer of ballet shoes and is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment.

Tod Mullinger, newly hired in the position of fixed-assets accountant, requested that Watt Kaster, Adamson's controller, review the following transactions.

Transaction 1

On December 1, 2008, Adamson Company purchased several assets of Haukap Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to $210,000 and included the assets listed below.

Adamson Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair market values of the assets which are also presented below.

During its fiscal year ended May 31, 2009, Adamson incurred $8,000 for interest expense in connection with the financing of these assets.
Transaction 2
On March 1, 2009, Adamson Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. Adamson intends to use the land for a parking lot. The trucks had a combined book value of $35,000, as Adamson had recorded $20,000 of accumulated depreciation against these assets. Adamson's purchasing agent, who has had previous dealings in the second-hand market, indicated that the trucks had a fair market value of $46,000 at the time of the transaction. In addition to the trucks, Adamson Company paid $19,000 cash for the land. The exchange has commercial substance.

Instructions
(a) Plant assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
(b) For each of the transactions described above, determine the value at which Adamson Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
(c) The books of Adamson Company show the following additional transactions for the fiscal year ended May 31, 2009. For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.
1. Acquisition of a building for speculative purposes.
2. Purchase of a 2-year insurance policy covering plant equipment.
3. Purchase of the rights for the exclusive use of a process used in the manufacture of balletshoes.

Transcribed Image Text:

Haukap Book Value $ 60,000 Fair Market Value $50,000 Inventory Land Building 40,000 80,000 70,000 $170,000 120,000 $250,000