You are engaged in the examination of the financial statements of the Ute Corporation for the year ended December 31, 19X3. The following schedules for the property, plant, and equipment and related allowance for depreciation accounts have been prepared by the client. You have checked your prior year's audit working papers.

Your examination reveals the following information:
1. All equipment is depreciated on the straight line basis (no salvage value taken into consideration) based on the following estimated lives: buildings, 25 years; all other items, 10 years. 'The company's policy is to take one-half year's depreciation on all asset acquisitions and disposals during the year.
2. On April 1, the company entered into a ten-year lease contract for a die casting machine with annual rentals of \(\$ 5,000\) payable in advance every April 1. The lease is cancellable by either party (sixty days' written notice is required) and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is ten years with no salvage value. The company recorded the die casting machine in the machinery and equipment account at \(\$ 40,400\), the present discounted value at the date of the lease, and \(\$ 2,020\), applicable to the machine, has been included in depreciation expense for the year.
3. The company completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was \(\$ 17,500\), the amount recorded in the Buildings account. Company personnel were used to construct the addition at a cost of \(\$ 16,000\) (materials, \(\$ 7,500\); labor, \(\$ 5,500\); and overhead, \(\$ 3,000)\).
4. Uil August \(18, \$ 5,000\) was paid for paving and fencing a portion of land owned by the company and used as a parking lot for employees. The expenditure was charged to the Land account.
5. The amount shown in the machinery and equipment asset retirement column represents cash received on September 5 upon disposal of a machine purchased in July \(19 \times 1\) for \(\$ 48,000\). The bookkeeper recorded depreciation expense of \(\$ 3,500\) on this machine in 19X3.
6. Crux City donated land and building appraised at \(\$ 10,000\) and \(\$ 40,000\) respectively to the Ute Corporation for a plant. On September 1, the company began operating the plant. Since no costs were involved, the bookkeeper made no entry for the above transaction.
Required:

a. Prepare the formal adjusting journal entries that you would suggest at December 31, 19X3 to adjust the accounts for the above transactions. Disregard income tax implications. The books have not been closed. Computations should be rounded-off to the nearest dollar.

b. Prepare a schedule for property, plant, and equipment and accumulated depreciation using the working paper reference \(P\).

Transcribed Image Text:

Ute Corp. Analysis of Property, Plant and Equipment and Related Allowance for Depreciation Accounts Year Ended December 31, 19X3 Assets Final Addi- Retire- Description 12/31/X2 tions ments Per Books 12/31/X3 Land $ 22,500 $ 5,000 $ 27,500 Buildings 120,000 17,500 137,500 Machinery and equipment 385,000 40,400 $26,000 399,400 .... $527,500 $62,900 $26,000 $564,400