Question
#1.Stargazer Company was incorporated on January 1, 2015 but was unable to begin manufacturing activities until July 1, 2015, because new factory facilities were not
#1.Stargazer Company was incorporated on January 1, 2015 but was unable to begin manufacturing activities until July 1, 2015, because new factory facilities were not completed until that date. The Land and Building account reported the following items during 2015:
January 31 Land and buildings $160,000
February 28 Cost of removal of building 9,800
May 1 Partial payment of new construction 60,000
May 1 Legal fees paid 3,770
June 1 Second payment on new construction 40,000
June 1 Insurance premium 2,280
June 1 Special tax assessment 4,000
June 30 General expenses 36,300
July 1 Final payment on new construction 30,000
December 31 Asset write up 53,800
399,950
December 31 Depreciation 2015 at 1% (4,000)
December 31, 2015 Account balance 395,950
The following additional information is to be considered:
1. To acquire land and building, the company paid $80,000 cash and 800 shares of its 8% cumulative preferred stock, par value $100 per share. Fair value of the stock is $117 per share.
2. Cost of removal of old buildings amounted to $9,800, and the demolition company retained all materials of the building.
3. Legal fees covered the following:
Cost of organization $610
Examination of title covering purchase of land1,300
Legal work in connection with construction contract1,860
3,770
4. Insurance premium covered the building for a 2 year term beginning May 1, 2015.
5. The special tax assessment covered street improvements that are permanent in nature.
6. General expenses covered the following for the period from Jan 1 to June 30, 2015.
Presidents salary$32,100
Plant superintendents salary supervision of new building4,200
36,300
7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building $53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.
8. Estimated life of building 50 years. Depreciation for 2015 1% of asset value (1% of $400,000 or $4,000)
Provide entries to reflect correct land, buildings and depreciation accounts at December 31, 2015. I would recommend you show detailed calculations to receive partial credit.
#2. You have a client that is considering trading machinery with another company. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your client would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:
Your Client Other Company
Original cost $150,000 $100,000
Accumulated depreciation 80,000 40,000
Fair value 100,000 80,000
Cash received (paid) 20,000 (20,000)
Record the entry on your clients books assuming the exchange LACKS commercial substance. Then discuss what the financial statement effects would be of treating the exchange as having, versus lacking, commercial substance.
#3.Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.
Using the FASB codification, answer the following questions (you must quote from the codification and include the section/paragraphs to receive credit).
a)What are the objectives for capitalizing interest?
b) Which assets qualify for interest capitalization?
c) Is there a limit to the amount of interest that may be capitalized in a period?
d) If interest capitalization is allowed, what disclosures are required?
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