Question
Fit Fixtures Incorporated (FFI) is a manufacturer of exercise equipment such as treadmills, stair climbers, and elliptical machines. The company has a December 31 year
Fit Fixtures Incorporated (FFI) is a manufacturer of exercise equipment such as treadmills, stair climbers, and elliptical machines. The company has a December 31 year end and uses ASPE. The accounting staff member who normally looks after the capital asset accounts was on maternity leave for the year, and the company put all transactions in a temporary account called Asset Additions and Disposals.
The company policy on calculating depreciation for partial periods of ownership is to take 50% of the normal amount of depreciation in the year of addition or disposal. Due to the staff member's maternity leave, no depreciation or amortization expense has yet been taken in 2020.
A- The company completed construction of a new plant in Saskatchewan on December 15, 2020, to help it better meet the needs of its customers west of Ontario. The costs associated with this construction project were as follows:
Land $500,000
Construction contract: building, 20 years of useful life, residual value of $50,000 1,500,000
Equipment(See below)
Furniture 250,000
Training costs (employees learning to use equipment) 45,000
Avoidable interest calculated at 8% on financing of construction project from
inception until put in use 75,000
The equipment purchased for the new plant was bought on a deferred payment contract signed on December 1. FFI issued a $5-million, five-year, non-interest-bearing note payable to the equipment supplier at a time when the annual market rate of interest was 6%. The note will be repaid with five equal payments made on December 1 of each year, beginning in 2021. Show calculations using factor Table A.4, a financial calculator, or Excel function PV. Round final amounts to the nearest dollar.
B-During the year, the company developed a new piece of exercise equipment that has a built-in video game. It was the policy to amortize development costs on a straight-line basis over three years, with 50% of the normal amount in the year of development. The costs associated with product development included:
Costs to determine how a video game would work with exercise equipment $ 50,000
Design, testing, and construction of prototype equipment 350,000
Costs to determine the best production process for the new equipment 40,000
Advertising costs to alert customers about the new product 47,000
Required: A-Determine whether each expenditure related to the new Saskatchewan plant must be capitalized, expensed or either (policy choice).
B- During the year, the company developed a new piece of exercise equipment that has a built-in video game. It was the policy to amortize development costs on a straight-line basis over three years, with 50% of the normal amount in the year of development. The costs associated with product development included:
Costs to determine how a video game would work with exercise equipment
$50,000
Design, testing, and construction of prototype equipment
350,000
Costs to determine the best production process for the new equipment
40,000
Advertising costs to alert customers about the new product
47,000
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