Key Largo Company, a manufacturer of snorkeling gear, 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. The newly hired fixed-asset accountant has requested that Key Largos controller review the following transactions:

Transaction 1: On August 1, 2020, Key Largo Company purchased equipment from Keys Corporation. Key Largo issued a

$50,000, 5-year, zero-interest-bearing note to Keys for the new equipment. Key Largo will pay off the note in five equal installments due at the end of each of the next 5 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 8%. Freight costs of $1,125 and installation costs of $2,000 were incurred in completing this trans- action.

Transaction 2: On December 1, 2020, Key Largo Company purchased several assets from Deep Sea Shores Inc., a small water recreation manufacturer whose owner was retiring. The purchase amounted to $300,000 and included the assets listed below. Key Largo Company engaged the services of an independent appraiser to determine the fair values of the assets which are also presented below.

	Deep Sea Book Value		Fair Value
Inventory	$120,000		$170,000
Land	80,000		68,000
Buildings	260,000		102,000
	$460,000		$340,000

During its fiscal year ended July 31, 2021, Key Largo incurred $16,000 for interest expense in connection with the financing of these assets.

Transaction 3: On June 1, 2021, Key Largo Company exchanged a number of used boats plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Key Largo intends to use the land for a parking lot.

The boats had a combined book value of $26,000, as Key Largo had recorded $34,000 of accumulated depreciation against these assets. Key Largos purchasing agent, who has had previous dealings in the secondhand market, indicated that the boats had a fair value of $31,000 at the time of the transaction. In addition to the boats, Key Largo Company paid $29,000 cash for the land.

Instructions

1. For each of the three transactions described above, determine the value at which Key Largo Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.

2. The books of Key Largo Company show the following additional transactions for the fiscal year ended May 31, 2021:

   1. Acquisition of a land for speculative purposes.

   2. Purchase of a 1-year insurance policy covering plant equipment.

   3. Purchase of the rights for the exclusive use of a process used in the manufacture of snorkeling gear.

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.