Question: Oak Island, Inc. reported the following related to its December 31, 20
ID: 2482383 • Letter: Q
Question
Question: 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
$200,000
Buildings, acquired January 1, 2013
100,000
Equipment, acquired January 1, 2013
700,000
Trucks, acquired March 1, 2013
90,000
Explanation / Answer
building value in jan 2013 = 100000
dep for year 2013 & 2014 2500*2 = 5000 (100000 / 40years= 2500)
book value = 95000
dep For 2015 = 2500
B.V of building 2015 = 92500
dep for 2016 = 2500
B.V of building 2016 = 90000
DEPRECIATION FOR EQUIPMENT
FOR IMPAIRMENT OF ASSET
RECOVERABLE AMOUNT HIGHER OF FOLLOWING IS TO BE TAKEN
1. estimated future cash flow = 240000
2. estimated future value in use = 205000
so recoverable amount is 240000
and book value of asset is 295000
so impairment of asset = 295000 - 240000 = 55000$
so value of asset = 240000
dep for 2016 = 56667
B.V OF ASSET = 183333$
Purchased a parcel of land with a building IN YEAR 2015
GAAP determines if demolition costs are capitalized or expensed depending on the following situations:
HENCE VALUE LAND INCLUDES
COST = 200000
COMMISSION = 17000
DEMOLISED COST = 21000
TOTAL VALUE OF LAND = 238000 $
LAND PURCHSE ON JAN 2013 & CONSTRUCTED STARTED O APRIL 2015
architect FEE = 25,000.
PAYMENT May2015 = 60000
PAYMENT oct 2015 = 100000
PAYMENT jan 2016 = 150000
total valur of asset to be recorded in year 2016 = 335000$
On November 30, 2016, Oak Island, Inc. purchased land with an existing building
fair value is to be taken
land = 112000
building $448,000
dep = 1244 ( 448000 / 30 year) / 12
roof of building = 40000
dep = 4000 ( 40000 / 10)
INCOME STATEMENT 2015 2016
INTEREST PAYABLE ON JAN 1 25000 25000 (250000 * 10%)
INTEREST PAYABLE ON JULY 1 50000 50000 ( 1000000 * 5% )
INTEREST FOR NOTE PAYABLE - 2833.33 ( 340000 * 10 % * 1/12)
Year Book Value Depreciation Depreciation Accumulated Book Value Depreciable Percent Expense Depreciation Year End 2013 $700,000 630000 25% $157,500 $157,500 $542,500 (7/28) 2014 $542,500 630000 21% $135,000 $292,500 $407,500 (6/28) 2015 $407,500 630000 18% $112,500 $405,000 $295,000 (5/28)Related Questions
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