1. (100 points) Oak Island, Inc. reported the following related to its December
ID: 2458395 • Letter: 1
Question
1. (100 points) Oak Island, Inc. reported the following related to its December 31, 2014 balance sheet:
Land, acquired January 1, 2013
$200,000
Buildings, acquired January 1, 2013
100,000
Equipment, acquired January 1, 2013
700,000
Trucks, acquired March 1, 2013
90,000
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, with 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, Oak Island, Inc. purchased a parcel of land with a building for $200,000. The closing statement indicated the land value was $130,000 and the building value was $70,000. In addition, to acquire the land, Oak Island paid a $17,000 commission to a real estate agent. Shortly after acquisition, the building was demolished at a cost of $21,000. Oak Island, Inc. plans to use this parcel of land to park equipment.
On April 1, 2015, Oak Island 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 $25,000. Excavation work began during the first week in April with payments made to the contractor as follows:
Date of Payment
Amount of Payment
May 31, 2015
$ 60,000
October 31, 2015
100,000
January 30, 2016
150,000
Construction was completed on January 31, 2016 and the building was first occupied on that same day.
Oak Island, Inc. had no new borrowings directly associated with the new building but had the following debt outstanding:
10%, 5-year note payable of $250,000, dated January 1, 2013, with interest payable annually on January 1.
5%, 10-year bond issue of $1,000,000 sold at par on July 1, 2012, with interest payable annually on July 1.
At December 31, 2015, after recording depreciation, management became concerned that, due to changes in technology, the equipment may be impaired. Estimated future cash flows associated with the equipment are $240,000 and its estimated fair value is $205,000.
On February 1, 2016, Oak Island, Inc. exchanged its used trucks (original cost, $90,000) plus cash of $38,000 for two new trucks. The used trucks had a combined fair market value of $60,000 at the time of the transaction. The exchange lacks commercial substance.
On November 30, 2016, Oak Island, 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 10%, payable each November 30. The seller reported that the land and building had book values of $20,000 and $330,000, respectively, prior to the sale. An independent appraisal reported that the fair value of the land and building was $112,000 and $448,000, 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 $40,000. The cost of the old roof is not known. Oak Island estimates that the replacement of the roof will increase the useful life of the building by 10 years.
Requirements:
Compute the book value for each of the above mentioned assets at December 31, 2015 and 2016.
Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions.
**Round all computations to the nearest whole dollar.
Land, acquired January 1, 2013
$200,000
Buildings, acquired January 1, 2013
100,000
Equipment, acquired January 1, 2013
700,000
Trucks, acquired March 1, 2013
90,000
Explanation / Answer
Date Asset amount life method residual 1/1/2013 Land 200,000 1/1/2013 Building 100,000 40 straight-line method 1/1/2013 Equipment 700,000 7 sum-of-the-years’-digits method 70,000 3/1/2013 Trucks 90,000 5 double-declining balance method 18,000 1/1/2015 Building 91,000 inc demolition 1/1/2015 Land 147,000 (inc commission) 2/1/2016 building 25,000 60,000 100,000 150,000 2/1/2016 Buliding total 335,000 Depreciation computation Year Asset Cost Depreciation 2013 Book value end of 2013 Depreciation 2014 Book value end of 2014 Dep 2015 WDV end of 2015 Dep 2016 WDV end of 2016 12/31/2013 Building 100,000 2,500 97,500 2,500 95,000 2,500 92,500 2,500 90,000 12/31/2013 Equipment 700,000 157,500 542,500 135,000 407,500 112500 295,000 - 12/31/2013 Trucks 90,000 24,000 66,000 19,200 46,800 11520 35,280 14,112.0 21,168.0 1/1/2015 Building 91,000 inc demolition 91,000 - 1/1/2015 Land 147,000 (inc commission) TOTAL 217,520 2/1/2016 Trucks 60000 60000 11/30/2016 Land 112,000 112,000 11/30/2016 Building 448,000 448,000 workings: Sum of digit asset value double-declining balance method Equipment 731,168 1 700,000 90,000 2 70,000 18,000 3 630,000 72,000 4 157,500 (630000/28*7) 24000 (72000*40%)*10/12 5 135,000 (630000/28*6) 48,000 6 112,500 (630000/28*5) 19200 (48000*40%) 7 28,800 28 11,520.0 interest computations interest 1/1/2013 10% 250,000 25,000 5% 1,000,000 50,000
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