CHAPTER 26

ACTIVITY: LAND, BUILDING AND MACHINERY

DEADLINE: NOVEMBER 30, 2021 @ 11:59PM

PROBLEM 1

On December 31, 2020, the ABC Co. shows the following account
for machinery it had assembled for its own use during 2020:

Account: MACHINERY

Item Debit Credit Balance

Cost of dismantling old 144,800 144,800
machine
Cash proceeds from sale of 120,000 24,800
old machine
RM used in construction of 760,000 784,800
new machine
Labor in construction of new 490,000 1,274,800
machine
Cost of installation 112,000 1,386,800
Materials spoiled in machine 24,000 1,410,800
trial runs
Profit on construction 240,000 1,650,800
Purchase of machine tools 130,000 1,780,800

An analysis of the details in the account disclosed the

following:
a. The old machine, which was removed before the installation of
the new one, had been fully depreciated.

b. Cash discounts received on the payments for materials used in

construction totaled P30,000 and these were reported in the
purchase discounts account.

c. The factory overhead account shows a balance of P2,920,000

for the year ended December 31, 2020; this balance exceeds
normal overhead on regular plant activities by approximately
P169,000 and is attributable to machine construction.

d. A profit was recognized on construction for the difference

between costs incurred and the price at which the machine could
have been purchased.
INSTRUCTIONS:
1. Determine the machinery and machine tools balances as of
December 31, 2020.
2. Give the individual journal entries necessary to correct the
accounts as of December 31, 2020, assuming that the nominal
accounts are still open.

PROBLEM 2

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
Partial payment of new building
5/1/12 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.

Instruction:

Determine the proper balances as of 12/31/12 for a separate land

account and a separate buildings account.

PROBLEM 3

On January 1, 2020, ABC Corporation purchased a tract of land (site

number 101) with a building for P1,800,000. Additionally, ABC
paid a real state broker’s commission of P108,000, legal fees of
P18,000 and title guarantee insurance of P54,000. The closing
statement indicated that the land value was P1,500,000 and the
building value was P300,000. Shortly after acquisition, the
building was razed at a cost of P225,000.

ABC entered into a P9,000,000 fixed-price contract with XYZ Inc.

On March 1, 2020 for the construction of an office building on the
land site 101. The building was completed and occupied on
September 30, 2021. Additional construction costs were incurred
as follows:

Plans, specifications and blueprints P 36,000

Architect’s fees for design and supervision 285,000

The building is estimated to have a forty-year life from date of

completion and will be depreciated using the 150%-declining-
balance method.

To finance the construction cost, ABC borrowed P9,000,000 on March

1, 2020. The loan is payable in ten annual installments of
P900,000 plus interest at the rate of 14%. ABC used part of the
loan proceeds for working capital requirements. ABC’s average
amounts of accumulated building construction expenditures were as
follows:
 For the period March 1 to December 31, 2020 P2,700,000
For the period January 1 to September 31,2021 6,900,000

ABC is using the allowed alternative treatment for borrowing cost.

Instruction:
Determine the following:
1. Cost of land site number 101

2. Cost of office building

3. Depreciation of office building for 2006