Sheffield Corporation, a manufacturer of steel products, began operations on Oct
ID: 2569965 • Letter: S
Question
Sheffield Corporation, a manufacturer of steel products, began operations on October 1, 2016. The accounting department of Sheffield has started the fixed-asset and depreciation schedule presented below. You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule are correct, you have obtained the following information from the company’s records and personnel.
1.
Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2.
Land A and Building A were acquired from a predecessor corporation. Sheffield paid $762,700 for the land and building together. At the time of acquisition, the land had an appraised value of $89,200, and the building had an appraised value of $802,800.
3.
Land B was acquired on October 2, 2016, in exchange for 2,700 newly issued shares of Sheffield’s common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $28 per share. During October 2016, Sheffield paid $16,100 to demolish an existing building on this land so it could construct a new building.
4.
Construction of Building B on the newly acquired land began on October 1, 2017. By September 30, 2018, Sheffield had paid $340,000 of the estimated total construction costs of $494,500. It is estimated that the building will be completed and occupied by July 2019.
5.
Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair value at $39,600 and the salvage value at $2,700.
6.
Machinery A’s total cost of $188,400 includes installation expense of $560 and normal repairs and maintenance of $16,000. Salvage value is estimated at $6,600. Machinery A was sold on February 1, 2018.
7.
On October 1, 2017, Machinery B was acquired with a down payment of $5,550 and the remaining payments to be made in 11 annual installments of $5,810 each beginning October 1, 2017. The prevailing interest rate was 8%. The following data were abstracted from present value tables (rounded).
Present value
of $1.00 at 8%
Present value
of an ordinary annuity
of $1.00 at 8%
10 years
0.463
10 years
6.710
11 years
0.429
11 years
7.139
15 years
0.315
15 years
8.559
Complete the schedule below. (Round answers to 0 decimal places, e.g. 45,892.) SHEFFIELD CORPORATION Fixed-Asset and Depreciation Schedule For Fiscal Years Ended September 30, 2017, and September 30, 2018 Depreciation Expense Year Ended September 30 Assets Salvage Depreciation Method Estimated Life in Years Acquisition Date October 1, 2016 ) $ October 1, 2016 (2) October 2, 2016(5) Under Construction Cost 2017 N/A 12,736 (4) 2018 Land A Building A Land B Building B Donated Equipment October 2, 2016 Machinery A Machinery B N/A $36,900 N/A N/A N/A Straight-line N/A Straight-line 150% declining-balance N/A N/A 30 10 8 N/A N/A $340,000 to date - (7) (10) (13) 2,700 October 2, 2016 6,600 Sum-of-the-years'-digits (12) October 1, 2017 Straight-line (14)Explanation / Answer
s
NOTES :
(1). When the Land and Building are inherited from the preceeding company, it is recorded at the appraised value and the difference in the actual cost and the appraised value is transferred to reserves account. So, here we record Land A and building A at their appraised values, i.e. $ 89,200 and $802,800, respectively.
(2). Building A is recorded at $802,800.
(3). Now, the salvage value of Building A is $36,900, Cost is $802,800, and first year depreciation by straight-line method as given is $12,736.
Depreciation by straight line is calculate by dividing the difference of cost and salvage value by the number of years of useful life.
i.e. (802800-36900)/N = 12,736.
By solving the above equation, we get, N = 60.14 = 60 years.
(4). In straight line method, amount of depreciation remains the same over the life of the asset. Hence, depreciation for 30.09.2018 is $12,736.
(5). Value of Land B :
To acquire land B, 2700 shares of par value $5, and Fair value of $28 are issued. Also, demolition of existing building on the said land is carried out, so that a new building can be errected. Demolition cost amounted to $16,100. Any cost incurred to make the asset usable is required to be capitalised.
Hence, value of Land B can be calculated as (2700*28)+16,100 = $91,700.
(6). Value of building under construction till 30.09.17 is $340,000.
Depreciation on an asset can be claimed only when the asset is put to use for the purpose of business. So, till the construction of building is completed, it cannot be put to use. As given in the data above, construction is expected to be completed only in July 2019, and total cost of construction is $494,000, with useful life of 30 years.
So, depreciation on building B can only be claimed for the year ending on 30.09.2019. Till then there won't be any depreciaton expense for building B.
(7). The donated equipment is recorded at fair value or appraised value.
(8) & (9) Depreciaton for the equipment cannot be calculated as the rate of depreciation is mentioned to be 150%. Depreciation on any asset can be claimed to the extent of 100% of the asset value. Hence, there seems to be an error in deciding the rate or method of depreciation.
(10). Cost of machine A is $188,400. $560 are spent for installation. So this amount will be added to tbe cost of acquisition. There is some expense for repairs also. The amount of repairs will be charged to Profit and loss statment. and the cost of Machine A will be recorded at (188400 + 560) = $188,960.
(11). & (12). Depreciation by sum of the years' digits method.
In this method of depreciation, the sum of the years of total life of assets is done. In this case life of the asset is 8 years. Hence sum of digits is 8+7+6+5+4+3+2+1 = 36.
Depreciation = (Number of years' life remaining/ sum of digits)* (Cost of asset-salvage value)
Salvage value is 6600.
Depreciation expense as on 30.09.17 = (8/36)* (188960-6600) = $40,524.
Depreciation expense as on 30.09.18 = (7/36)* (188960-6600)*5/12 = $14,775.
The asset has been discarded during February 2018. And as per the company policy, depreciation is charged only upto the first of the month of disposition. hence, 5 months depreciation (from october to february) is being charged.
Assets Date of Acquisition Cost of Acquisition Salvage Value Method of Depreciation Life of the Asset Depreciation Expense for the year ended September 30 2017 2018 Land A 1.10.2016 (1) 89,200 N/A N/A N/A N/A N/A Building A 1.10.2016 (2) 802,800 36,900 Straight Line 60 12,736 (4) 12,736 Land B 2.10.2016 (5) 91,700 N/A N/A N/A N/A N/A Building B Under Construction 340,000 N/A Straight line 30 -- (6) 0 Donated Equipment 2.10.2016 (7) 39,600 2,700 150% Declining balance 10 (8) Refer note (9) Refer note Machine A 2.10.2016 (10) 188,960 6,600 Sum of years' digits 8 (11) 40,524 (12) 14,775 Machine B 1.10.2017 (13) -- Straight line 20 (14)Related Questions
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