P10-3 (Classification of Land and Building Costs) Spitfire Company was incorpora
ID: 2389151 • Letter: P
Question
P10-3 (Classification of Land and Building Costs) Spitfire Company was incorporated on January 2,2013, but was unable to begin manufacturing activities until July 1, 2013, because new factory facilities
were not completed until that date.
The Land and Building account reported the following items during 2013.
January 31 Land and building $160,000
February 28 Cost of removal of building 9,800
May 1 Partial payment of new construction 60,000
May 1 Legal fees paid 3,770
June 1 Second payment on new construction 40,000
June 1 Insurance premium 2,280
June 1 Special tax assessment 4,000
June 30 General expenses 36,300
July 1 Final payment on new construction 30,000
December 31 Asset write-up 53,800
399,950
December 31 Depreciation—2013 at 1% 4,000
December 31, 2013 Account balance $395,950
The following additional information is to be considered.
1. To acquire land and building, the company paid $80,000 cash and 800 shares of its 8% cumulative
preferred stock, par value $100 per share. Fair value of the stock is $117 per share.
2. Cost of removal of old buildings amounted to $9,800, and the demolition company retained all
materials of the building.
3. Legal fees covered the following.
Cost of organization $ 610
Examination of title covering purchase of land 1,300
Legal work in connection with construction contract 1,860
$3,770
4. Insurance premium covered the building for a 2-year term beginning May 1, 2013.
5. The special tax assessment covered street improvements that are permanent in nature.
6. General expenses covered the following for the period from January 2, 2013, to June 30, 2013.
President’s salary $32,100
Plant superintendent’s salary—supervision of new building 4,200
$36,300
7. Because of a general increase in construction costs after entering into the building contract, the board
of directors increased the value of the building $53,800, believing that such an increase was justified
to reflect the current market at the time the building was completed. Retained earnings was credited
for this amount.
8. Estimated life of building—50 years.
Depreciation for 2013—1% of asset value (1% of $400,000, or $4,000).
Instructions
(a) Prepare entries to reflect correct land, building, and depreciation accounts at December 31, 2013.
(b) Show the proper presentation of land, building, and depreciation on the balance sheet at December
31, 2013.
Explanation / Answer
account
Dr
Cr
Land
173,600
Cash
80,000
Preferred Stock
80,000
Additional Paid-In Capital
13,600
account
Dr
Cr
Land
9800
Cash
9800
account
Dr
Cr
Organization expense
610
land
1300
building
1860
cash
3770
account
Dr
Cr
Land
4000
Cash
4000
account
Dr
Cr
building
190
insurance
570
Prepaid insurance
1520
cash
2280
account
Dr
Cr
Salary expense
32100
building
4200
cash
36300
account
Dr
Cr
building
53800
Retained earning
53800
account
Dr
Cr
Depreciation expense
1363
depreciation
1363
Depreciation
Cost of building
136250
Life of assest-
50
Annaula depreciation
2725
Place in service
X 1/2
Depreciation
1363
account
Dr
Cr
Land
173,600
Cash
80,000
Preferred Stock
80,000
Additional Paid-In Capital
13,600
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