Problem 3

Gibbs Manufacturing Co. was incorporated on 1/2/12 but was unable to begin manufacturing activities until 8/1/12 because new factory facilities were not completed until that date. The Land and Buildings account at 12/31/12 per the books was as follows:

Date Item Amount

1/31/12 Land and dilapidated building $200,000

2/28/12 Cost of removing building 4,000

4/1/12 Legal fees 6,000

5/1/12 Fire insurance premium payment 5,400

5/1/12 Special tax assessment for streets 4,500

5/1/12 Partial payment of new building construction 170,000

8/1/12 Final payment on building construction 170,000

8/1/12 General expenses 30,000

12/31/12 Asset write-up 75,000

$664,900

Additional information:

1. To acquire the land and building on 1/31/12, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a fair value per share of $140.

2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material.

3. Legal fees covered the following:

Cost of organization $2,500

Examination of title covering purchase of land 2,000

Legal work in connection with the building construction 1,500

$6,000

4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2012.

5. General expenses covered the following for the period 1/2/12 to 8/1/12.

President's salary $20,000

Plant superintendent covering supervision of new building 10,000

$30,000

6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.

Instructions

Determine the proper balances as of 12/31/12 for a separate land account and a separate buildings account. Use separate T-accounts (one for land and one for buildings) labeling all the relevant amounts and disclosing all computations.