Selfridge and Company, Inc. reported the following related to its December 31, 2
ID: 2463035 • Letter: S
Question
Selfridge and Company, Inc. reported the following related to its December 31, 2014 balance sheet:
Land, acquired January 1, 2013
$ 80,000
Buildings, acquired January 1, 2013
200,000
Equipment, acquired January 1, 2013
300,000
Trucks, acquired March 1, 2013
140,000
Buildings are depreciated using a 40 year life, the straight-line method, and no residual value.
Equipment is depreciated using a 7 year life, the sum-of-the-years’-digits method, and a residual value of 10% of the equipment’s initial cost.
Trucks are depreciated using a 5 year life, the double-declining balance method, and a residual value of 20% of the trucks initial cost.
Early in 2015, Selfridge and Company, Inc. purchased a parcel of land with a building for $400,000. The closing statement indicated the land value was $330,000 and the building value was $70,000. In addition, to acquire the land, Selfridge and Company paid a $16,000 commission to a real estate agent and title insurance of $3,000. Shortly after acquisition, the building was demolished at a cost of $21,000. $14,000 was generated from the sale of salvaged materials. Selfridge and Company, Inc. plans to hold this parcel of land for resale.
On April 1, 2015, Selfridge and Company began construction of a new building on land that it has owned since 2013. Architectural plans were formalized on April 1, when the architect was paid $15,000. Excavation work began during the first week in April with payments made to the contractor as follows:
Date of Payment
Amount of
April 30, 2015
$60,000
October 1, 2015
100,000
January 1, 2016
150,000
Construction was completed on January 31, 2016 and the building was first occupied on that same day.
Selfridge and Company, Inc. had no new borrowings directly associated with the new building but had the following debt outstanding:
10%, 5-year note payable of $1,000,000, dated January 1, 2013, with interest payable annually on January 1. 5%, 10-year bond issue of $1,000,000, sold at par on December 31, 2014, with interest payable annually on December 31.
On January 1, 2016, management became concerned that, due to changes in technology, the equipment may be impaired. Estimated future cash flows associated with the equipment are $150,000 and its estimated fair value is $90,000.
On February 1, 2016, Selfridge and Company, Inc. exchanged its used trucks plus cash of $60,000 for two new trucks. The used trucks had a combined fair market value of $20,000 at the time of the transaction. The exchange lacks commercial substance.
On November 30, 2016, Selfridge and Company, Inc. purchased land with an existing building for $540,000 by making a $200,000 down payment and signing a $340,000 note payable which carries interest at the rate of 8%, payable each November 30. The seller reported that the land and building had book values of $25,000 and $375,000, respectively, prior to the sale. An independent appraisal reported that the fair value of the land and building was $116,000 and $464,000, respectively, at the time of sale. At the point of acquisition, the estimated remaining useful life of the building was 30 years. Immediately after acquisition, the roof on the building was replaced at a cost of $30,000. The cost of the old roof is not known. Selfridge and Company estimates that the replacement of the roof will not increase the useful life of the building or otherwise enhance operational efficiency.
Related to the above:
(a) Prepare the property, plant, and equipment and current liabilities sections of Selfridge’s balance sheet
for 2015 and 2016. For assets acquired, but not reported as part of PP&E, indicate how they should be
reported in each year.
(b) Provide the income statement effects on an item-by-item basis (e.g. total depreciation expense, total
interest expense, etc.) for Selfridge for 2015 and 2016.
Recommendation: Make all journal entries for 2013-2016 for the items described above. Round all computations to the nearest whole dollar.
Land, acquired January 1, 2013
$ 80,000
Buildings, acquired January 1, 2013
200,000
Equipment, acquired January 1, 2013
300,000
Trucks, acquired March 1, 2013
140,000
Explanation / Answer
Journal Entries and Adjustment Entries Date Accounts Title Debit Credit 1-Feb Cash 30,000 Common Stock 30,000 (Capital Invested) 1-Feb Prepaid Rent 6,000 Cash 6,000 (Rent Paid in advance) 1-Feb Supplies 450 Cash 450 (Purchase supplies for cash) 1-Feb Inventory 10,000 Accounts Payable 10,000 (Purchase Inventory) 1-Feb Prepaid Insurance 2,400 Cash 2,400 (Insurance paid in advance) 2-Feb Cash 24,000 Bank Loan 24,000 (Loan taken from bank) 3-Feb Computer 5,000 Cash 5,000 (Computer purchase) 3-Feb Furniture and Fixtures 18,500 Cash 18,500 (Furniture Purchase) 3-Feb Advertisement Expenses 1,000 Cash 1,000 (Advertisement expenses Paid) 8-Feb Cash 2,000 Accounts Receivable 3,500 Sales 5,500 (Sales made) 8-Feb Cost of goods sold 1,500 Inventory 1,500 (Cost of inventory sold) 10-Feb Accounts Payable 500 Cash 500 (Cash Paid for purchase) 15-Feb Wages 1,500 Cash 1,500 (Wages paid) 15-Feb Cash 1,300 Accounts Receivable 1,200 Sales 2,500 (Sales made) 15-Feb Cost of goods sold 1,125 Inventory 1,125 (Cost of inventory sold) 16-Feb Supplies 350 Accounts Payable- Supplies 350 (Supplies payment made) 20-Feb Repairs 215 Cash 215 (Payment for repairs) 20-Feb Cash 100 Accounts Receivable 100 (Cash received for sales) 22-Feb Sales Return 50 Cash 50 (Goods returned by customer) 22-Feb Inventory 35 Cost of goods sold 35 (Cost of goods returned) 22-Feb Cash 100 Unearned Revenue 100 (Cash reveived in advance) 22-Feb Cash 2,250 Accounts Receivable 2,195 Sales 4,445 (Sales made) 22-Feb Cost of Goods sold 2,050 Inventory 2,050 (Cost of inventory sold) 25-Feb Accounts Payable 1,000 Cash 1,000 (Cash Paid for purchase) 29-Feb Heating Expenses 1,000 Expenses payable 1,000 (Bill received for expenses) 29-Feb Supplies Expenses 525 Supplies 525 29-Feb Wages Expenses 1,400 Wages Payable 1,400 29-Feb Cash 1,800 Accounts Payable 3,200 Sales 5,000 29-Feb Cost of Goods sold 2,750 Inventory 2,750 29-Feb Rent Expenses 2,000 Prepaid Rent 2,000
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