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Comprehensive

Pell Corporation's property, plant, and equipment and accumulated depreciation accounts had the following balances at December 31, 2015:

	Property, Plant, and Equipment	Accumulated Depreciation
Land	$350,000	$
Land Improvements	180,000	45,000
Building	1,500,000	350,000
Machinery and Equipment	1,158,000	405,000
Automobiles	150,000	112,000

Depreciation method and useful lives:

Land improvements: Straight-line; 15 years.

Building: 150%-declining-balance; 20 years.

Machinery and equipment: Straight-line; 10 years.

Automobiles: 150%-declining-balance; 3 years.

Depreciation is computed to the nearest month. No salvage values are recognized.

Transactions during 2016:

On January 2, 2016, machinery and equipment were purchased at a total invoice cost of $260,000, which included a $5,500 charge for freight. Installation costs of $27,000 were incurred.

On March 31, 2016, a machine purchased for $58,000 on January 3, 2012, was sold for $36,500.

On May 1, 2016, expenditures of $50,000 were made to repave parking lots at Pell's plant location. The work was necessitated by damage caused by severe winter weather.

On November 2, 2016, Pell acquired a tract of land with an existing building in exchange for 10,000 shares of Pell's $20 par common stock, which had a market price of $38 a share on this date. Pell paid legal fees and title insurance totaling $23,000. The last property tax bill indicated assessed values of $240,000 for land and $60,000 for building. Shortly after acquisition, the building was razed at a cost of $35,000 in anticipation of new building construction in 2017.

On December 31, 2016, Pell purchased a new automobile for $15,250 cash and trade-in of an automobile purchased for $18,000 on January 1, 2015. The new automobile has a cash value of $19,000.

Required:

1. Prepare a schedule analyzing the changes in each of the plant assets during 2016. Disregard the related accumulated depreciation accounts.

PELL CORPORATION
Analysis of Changes in Plant Assets
For the Year Ended December 31, 2016
	Balance 12/31/15	Increase	Decrease	Balance 12/31/16
Land	$	$		$
Land improvements
Building
Machinery and equipment
Automobiles
Totals	$	$	$	$

Feedback

Your task for this requirement is to compute the changes in each of the plant assets during 2016. The following partially completed schedule will help you organize the basic information.

	Balance 12/31/15	Increase	Decrease	Balance 12/31/16
Land	$350,000
Land improvements	180,000
Building	1,500,000
Machinery and Equipment	1,158,000
Automobiles	150,000
Total	$3,338,000			$4,006,000

The following steps will help you to find the information you need to complete the schedule:

Prepare a t-account for each asset account and the related accumulated depreciation account. Record the beginning balance in each account.

Review the transactions given in the problem (1-5) and prepare journal entries to record the information. You should review the information given below. Pay particular attention to any gains or losses on a transaction and watch for a partial year's depreciation on an asset acquisition or disposal.

Post the information from the journal entries into your t-accounts.

Transaction information

The acquisition cost of property, plant, and equipment includes all costs necessary to obtain the benefits to be derived from the asset. Specifically, you should capitalize or record as part of the cost of the asset any expenditure necessary to obtain the asset and put it in operating condition.

To account for the disposal of property, plant, and equipment, the company first records the depreciation up to the date of the disposal. It then removes the cost of the asset and the related amount of accumulated depreciation from the respective accounts. A company recognizes a gain or a loss on the disposal for the difference between the book value of the asset (cost minus accumulated depreciation) and the consideration received.

After initial acquisition, companies make various expenditures relating to property, plant, and equipment for purposes ranging from routine repairs to major overhauls and improvements. The related accounting decision is whether to report these expenditures as investments that enhance property, plant, and equipment or to expense them. An expenditure that increases the expected future economic benefits of the asset above those that originally were expected is a capital expenditure. An expenditure that does not increase the economic benefits but is incurred to maintain the existing benefits is an operating expenditure and is expensed in the period incurred.

A nonmonetary exchange is a reciprocal transfer between a company and another entity, in which the company acquires nonmonetary assets or services by surrendering other nonmonetary assets or services. In general, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered. If the fair value of the asset received is more clearly evident than the fair value of the asset surrendered, it can be used to measure the cost of the asset acquired. You should recognize a gain or loss on the exchange when there is a difference between the fair value of the asset surrendered and its book value. When a small amount of cash, often referred to as boot, is also given or received, the cost of the asset acquired and the gain or loss on the nonmonetary asset surrendered is determined by these equations.

Cost of Asset Acquired

=

Fair Value of Asset Surrendered

+ Cash Paid Or - Cash Received

and

Gain (Loss)

=

Fair Value of Asset Surrendered

-

Book Value of Asset Surrendered

2. For each asset classification, prepare a schedule showing depreciation expense for the year ended December 31, 2016.

PELL CORPORATION
Depreciation Expense
For the Year Ended December 31, 2016
Land improvements:
Total depreciation on land improvements			$
Building:
Total depreciation on building
Machinery and equipment:
Cost of machinery and equipment, Balance, 12/31/15	$
Deduct machine sold 3/31/16		$
Depreciation after applying straight-line rate
Cost of asset purchased 1/2/16		$
Depreciation
Cost of machine sold 3/31/16		$
Depreciation from 1/1/16 to 3/31/16
Total depreciation on machinery and equipment
Automobiles:
Total depreciation on automobiles
Total depreciation expense for 2016			$

Feedback

You should use the end of year balances in your the t-accounts from requirement 1 to calculate the annual depreciation expense for each asset classification. Pay particular attention to acquisition and disposal dates and account for a partial year's depreciation if necessary.

3. Prepare a schedule showing the gain or loss from each asset disposal that Pell would recognize in its income statement for the year ended December 31, 2016.

PELL CORPORATION
Gain or Loss from Plant Asset Disposals That Would Be Recognized in Income Statement
For the Year Ended December 31, 2016
	Gain or (loss)
Sale of machine 3/31/16:
Selling price	$
Carrying amount of machine sold
Gain on sale	$
Trade-in of automobile 12/31/16:
Carrying amount of trade-in	$
Trade-in allowed
Loss on trade-in
Net gain from asset disposals	$