The following information is found during your audit: All equipment is depreciat
ID: 2578299 • Letter: T
Question
The following information is found during your audit:
All equipment is depreciated on the straight-line basis (no salvage value taken into consideration) based on the following estimated lives: buildings, 25 years; all other items, 10 years. The corporation’s policy is to take one-half year’s depreciation on all asset acquisitions and disposals during the year.
On April 1, the corporation entered into a 10-year lease contract for a die-casting machine with annual rentals of $50,000, payable in advance every April 1. The lease is cancelable by either party (60 days’ written notice is required), and there is no option to renew the lease or buy the equipment at the end of the lease. The estimated useful life of the machine is 10 years with no salvage value. The corporation recorded the die-casting machine in the machinery and equipment account at $404,000, the present value at the date of the lease, and $20,200, applicable to the machine, has been included in depreciation expense for the year.
The corporation completed the construction of a wing on the plant building on June 30. The useful life of the building was not extended by this addition. The lowest construction bid received was $175,000, the amount recorded in the buildings account. Company personnel were used to construct the addition at a cost of $160,000 (materials, $75,000; labor, $55,000; and overhead, $30,000).
On August 18, $50,000 was paid for paving and fencing a portion of land owned by the corporation and used as a parking lot for employees. The expenditure was charged to the land account.
The amount shown in the machinery and equipment asset retirement column represents cash received on September 5, upon disposal of a machine acquired in July 2012 for $480,000. The bookkeeper recorded depreciation expense of $35,000 on this machine in 2016.
Crux City donated land and building appraised at $100,000 and $400,000, respectively, to the UTE Corporation for a plant. On September 1, the corporation began operating the plant. Because no costs were involved, the bookkeeper made no entry for the foregoing transaction.
Required
In addition to inquiry of the client, explain how you would have found each of these six items during the audit.
Prepare the adjusting journal entries with supporting computations that you would suggest at December 31, 2016, to adjust the accounts for the preceding transactions. Disregard income tax implications.*
*AICPA adapted. Copyright by American Institute of CPAs. All rights reserved. Used with permission.
UTE Corporation Analysis of Property, Plant, and Equipment and Related Allowance for Depreciation Accounts Year Ended December 31,2016 Final 12/31/15 Additions Retirements 12/31/16 Per Books Descriptiorn Assets $ 225,000 $50,000 1,200,000175,000 $275,000 1,375,000 Machinery and equipment 3,850,000 404,000 260,000 3994,000 S 5,275,000 $629,000 $ 260,000 $5,644,000 Buildings Allowance for Depreciation Building 600,000 $51,500 732,500 392,200 $ 2,332,500 $443,700 $651,500 2,124,700 $ 2,776,200 Machinery and equipment 1.Explanation / Answer
Point 1:
As lease is cancelled by both the parties the entries which are passed earlier are to be reversed.
so Debit lessor a/c with $404,000
and credit machinery & equipment with $404,000.
and debit Depreciation allowence $20,200
credit Depreciation expense with $20,200
Point 2 On june 30 company completed a construction where their is no extention in useful life of the building so it is to be debited to building expenditure at the cost which is incurred by the company not by the amount which bid least
so adjustment entry is
Credit Buildings with $ 175,000
the cost which is incurred is to be debited to building expenditure ac i.e $160,000
Point 3 paving and fencing a portion of land is a revenue expenditure not a capital expenditure it is to be reversed from land accoount i.e $50,000 shoul be credited in land account
Point 4
Machinery sold for $260,000
Machinery purchased at $480,000
depreciation for whole year is $35,000
depreciation allowance would be 17500+35000+35000+35000+23780=$146,280
23780 is 35000*248days (till sep 5 )/365
Closing balance on september 5th is $333,720
sold for $260,000
so loss of 73,720 is to be credited from machinery and equipment account and debit with loss on sale of machinery and equipment
Point 5 even though asset is received as donation it is to be booked at fair value or market value of similar asset or the net present value of the expected future cash flows generated by the asset so land and building is to be debited with $500,000 and credit contribution revenue account.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.