14-Capitalizing acquisition costs. Gibbs Manufacturing Co. was incorporated on 1

Question

14-Capitalizing acquisition costs. Gibbs Manufacturing Co. was incorporated on 1/2/17 but was unable to begin manufacturing activities until 8/1/17 because new factory facilities were not completed until that date. The Land and Buildings account at 12/31/17 per the books was as follows: Amount $200,000 4,000 6,000 5,400 4,500 210,000 210,000 30,000 Item 1/31/17 2/28/17Cost of removing building Land and dilapidated building Legal fees Fire insurance premium payment Special tax assessment for streets Partial payment of new building construction Final payment on building construction General expenses 12/31/17 Asset write-up Additional information: 1. To acquire the land and building on 1/31/17, the company paid $100,000 cash and 1,000 $744.900 shares of its common stock (par value = $100 share) which is very actively traded and had a fair value per share of $180. 2. When the old building was removed. Gibbs paid Kwik Demolition Co. $4,000, but also 3. Legal fees covered the following: received $1,500 from the sale of salvaged material. Cost of organization Examination of title covering purchase of land Legal work in connection with the building construction $2,500 2,000 1,500 $6,000 4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2017. 5. General expenses covered the following for the period 1/2/17 to 8/1/17 President's salary Plant superintendent covering supervision of new building $20,000 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 12/31/17 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.

Explanation / Answer

Land account 2017 1-Jan Fair value acquisition cost(100000+(1000*180)) 280000 28-Feb Cost of removing less salvage(4000-1500)(Capitalised--to bring the land to the intended use) 2500 Apr 1 Legal fees(Examination of title to Land) 2000 31-Dec Ending Balance 284500 Buildings Account 2017 Apr 1 Legal fees-work in connection with bldg. constrn. 1500 1-May Partial payment of new building construction 210000 1-Aug Final payment of new building construction 210000 Building supervision charges(during construction) 10000 31-Dec Ending Balance 431500 NOTES: 1. Land is to be recorded at Fair/market value 2. Only costs net of salvage is to be considered. 3.Cost of organisation is a post-incorporation expense. 4. Fire insurance premium is for maintenance of the building & by itself does not add value to the building & hence treated as a revenue expenditure(5400/36mths.*8 mths= 1200 expensed in 2017 & balance(4200) carried as prepaid insurance 5. Presiden's salary is a revenue expense Building supervision charges of plant superintendent is assumed to be incurred during construction 6. Rising land costs cannot be recorded on mere belief of the President

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