Ch 10 Problems: P10-2
Land Balance at December 31,
2013 $300,000
Plant facility acquired from
Mendota Co
portion
$185,000
Balance December 31st,
2014
$485,000
Buildings
Balance
as of December 31st, 2013 $1,100,000
Plant
acquired from Mendota Co. $555,000
Portion
of fair value of building
Balance
as of December 31st, 2014 $1,655,000
Schedule to
calculate the fair value of the building acquired from Mendota
Lobo
Stock ($37 x
20,000)
$740,000
Book
Value of the property ($110,000 +
$320,000) $430,000
Appraisal
($230,000 +
$690,000) $920,000
Building=
$690,000/$920,000 or
75% $555,000
Land
Improvements
Debit
Credit
Land
Improvements $95,000
Cash $95,000
Equipment
XXX
(b) List the items in the fact
situation that were not used to determine the answer to (a), showing the
pertinent amounts and supporting computations in good form for each item. In addition,
indicate where, or if, these items should be included in Lobo's financial
statements.
Write a 350- to 700-word
paper in which you respond to the following Discussion Question from the text:
Land
In 2014, a transaction to purchase land was made
in exchange for company stock. The value of the land is below the appraised
value in Mendota Co’s balance sheet. We calculate the value of the land in a
percentage. So we take the land and building total making it a total of 100%.
The fair market value of the stock is $740,000. Since only 25% of the 100
percent is land purchase; we would multiply the $740,000 and 25 percent. This
gives up the value of the $185,000, which makes the balance be $485,000 for the
land.
$740,000*.25=$185,000
Land Improvements
In 2013, $140,000 worth of land
improvements were made to the property that had an indefinite life so it is not
necessary to account for depreciation in this case. Indefinite land
improvements should be added to the land value. In 2014, $95,000 worth of land
improvements adding functionality to the property was added with a useful life
of 15 years. In 2015, the company will need to depreciate the land improvements
at $6,333 for each subsequent year. Demolition of existing structures and
grading or clearing the land have perpetual life therefore is not depreciable.
Land Improvements that require depreciation include drainage, fencing,
landscaping, parking lots and sidewalks.
Building
During 2014, a transaction
occurred to buy a building and its land in exchange for company stock. Since this transaction involved the exchange of stock for
an asset consisting of a building and land and these two assets have a book
value below the appraised value in Mendota Co.’s balance sheet, we calculate
their value as a percentage of the total appraisal to allocate each asset’s
acquisition cost correctly vs the value of the stock issued.
So if the fair
market value of the stock is $740,000 and the appraised value of the building
is 75% of the property, it will be recorded at a value of $555,000
($740,000x.75=$555,000).
TUTORIAL PREVIEW
(a)
LOBO CORPORATION
| |||
Analysis of Land Account
| |||
2014
| |||
Balance at January 1, 2014
|
$ 300,000
| ||
Plant facility acquired from Mendota Company—portion of fair value allocated to land (Schedule 1)
|
185,000
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