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P10-4 (LO1,4,6) GROUPWORK (Dispositions, Including Condemnation, Demolition, and

Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.
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Schedule of Property Dispositions

Cost Accumulated Depreciation Cash Proceeds Fair Value Nature of Disposition
Land $40,000 — $31,000 $31,000 Condemnation
Building 15,000 —   3,600 — Demolition
Warehouse 70,000 $16,000  74,000  74,000 Destruction by fire
Machine 8,000   2,800     900   7,200 Trade-in
Furniture 10,000   7,850 —   3,100 Contribution
Automobile 9,000   3,460   2,960   2,960 Sale
The following additional information is available.
Land: On February 15, a condemnation award was received as consideration for unimproved
land held primarily as an investment, and on March 31, another parcel of unimproved land to be
held as an investment was purchased at a cost of $35,000.
The loss on the condemnation of the land of $9000 ($40000-$31000) should be reported
as another income and expense item on the income statement. The $35000 land purchase has no
income statement effect.
Building: On April 2, land and building were purchased at a total cost of $75,000, of which 20%
was allocated to the building on the corporate books. The real estate was acquired with the
intention of demolishing the building, and this was accomplished during the month of November.
Cash proceeds received in November represent the net proceeds from demolition of the building.
There is no recognized gain or loss on the demolition of the building. The entire purchase
cost ($15000), decreased by the demolition proceeds ($3,600), is allocated to land.
Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased
January 2, 2014, and had depreciated $16,000. On December 27, the insurance proceeds and
other funds were used to purchase a replacement warehouse at a cost of $90,000.
The gain on the destruction of the warehouse should be reported as another income and
expense item. The gain is computed as follows:
Insurance proceeds....................................... $74,000
Deduct: Cost................................................... $70,000
Less: Accumulated depreciation.... $16,000 54,000
Realized gain................................................. $20,000
Some may think that a portion of this gain should be deferred because the proceeds are
reinvested in similar assets. We do not believe such an approach should be permitted. Deferral of
the gain in this situation is not permitted under IFRS.

Machine: On December 26, the machine was exchanged for another machine having a fair value
of $6,300 and cash of $900 was received. (The exchange lacks commercial substance.)
The unrecognized gain on the transaction would be computed as follows:
Fair value of old machine............................. $7,200
Deduct: Book value of old machine
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Cost................................................... $8,000
Less: Accumulated depreciation... 2,800 5,200
Total gain........................................................ $2,000

This gain would be deducted from the fair value of the new machine in computing the new
machines cost. The cost of the new machine would be capitalized at $4,300.
Fair value of new machine.............................................................. $6,300
Less: gain deferred........................................................................... $2,000
Cost of new machine....................................................................... $4,300
Furniture: On August 15, furniture was contributed to a qualified charitable organization. No
other contributions were made or pledged during the year.
The contribution of the furniture would be reported as a contribution expense of $3100
with a related gain on disposition of furniture of $950: $3100 - ($10000-$7850). The
contribution expense and the related gain may be netted.
Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.
The loss on sale of the automobile of $2580: [$2960-($9000-$3460)] should be reported
in the other income and expense section.

P10-6 (LO1,3) (Interest During Construction) Grieg Landscaping began construction of a new
plant on December 1, 2017. On this date, the company purchased a parcel of land for $139,000
in cash. In addition, it paid $2,000 in surveying costs and $4,000 for a title insurance policy. An
old dwelling on the premises was demolished at a cost of $3,000, with $1,000 being received
from the sale of materials.

Architectural plans were also formalized on December 1, 2017, when the architect was
paid $30,000. The necessary building permits costing $3,000 were obtained from the city and
paid for on December 1 as well. The excavation work began during the first week in December
with payments made to the contractor in 2018 as follows.

The building was completed on July 1, 2018.

To finance construction of this plant, Grieg borrowed $600,000 from the bank on
December 1, 2017. Grieg had no other borrowings. The $600,000 was a 10-year loan bearing
interest at 8%.
Compute the balance in each of the following accounts at December 31, 2017, and December 31,
2018. (Round amounts to the nearest dollar.)
(a)Land.
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(b)Buildings.
(c)Interest Expense.

(a) Land Account Balance 2017 and 2018

139,0
Price
00

2,0
Survey Costs
00

4,0
Title Insurance Policy
00

3,0
Demolition Costs
00

(1,
Salvage of Materials
000)

147,0
Land Cost
00

Building (2017)

Expenditures (2017)
Weighted expenditure
Date Amount Period
147,00
1-Dec 1/12 12,250
0
30,00
1-Dec 1/12 2,500
0
3,00
1-Dec 1/12 250
0
180,00
15,000
0

Building (2017)

Expenditures (2018)
Weighted
expenditure
Date Amount Period
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1-Jan 180,000 1/2 90,000

1-Jan 1,200 1/2 600

1-Mar 240,000 1/3 80,000

1-May 330,000 1/6 55,000

1-Jul 60,000 0 0

811,200 225,600

Account balances as of December 31, 2017 and December 31, 2018

(a) Land Account – 2017 $147,000

Land Account – 2018 $147,000

(b) Building – 2017 $34,200

Building – 2018 $682,248

(c) Interest Expense – 2017 $2,800

Interest Expense – 2018 $29,952

Calculations

Building – 2017 - 30,000 + 3,000 + 1,200 = $34,000

Building – 2018 – 34,200 + 240,000 + 330,000 + 60,000 + 18, 048 = $682,248

Calculations for Interest Expense.

15,000
8%
1,200 Interest to be Capitalized for 2017

600,000
8%
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48,000
1/12
4,000
1,200
2,800 Interest expense for 2017

225,600
8%
18,048 Interest to be Capitalized for 2018

600,000
8%
18,048
29,952 Interest expense for 2018

CA11-5 ETHICS (Depreciation Choice—Ethics) Jerry Prior, Beeler Corporation’s controller,

is concerned that net income may be lower this year. He is afraid upper-level management might
recommend cost reductions by laying off accounting staff, including him.

Prior knows that depreciation is a major expense for Beeler. The company currently uses the
double-declining-balance method for both financial reporting and tax purposes, and he’s thinking
of selling equipment that, given its age, is primarily used when there are periodic spikes in
demand. The equipment has a carrying value of $2,000,000 and a fair value of $2,180,000. The
gain on the sale would be reported in the income statement. He doesn’t want to highlight this
method of increasing income. He thinks, “Why don’t I increase the estimated useful lives and the
salvage values? That will decrease depreciation expense and require less extensive disclosure,
since the changes are accounted for prospectively. I may be able to save my job and those of my
staff.”
Instructions
Answer the following questions.
a. Who are the stakeholders in this situation?
Prior, his staff, shareholders and even potential investors are the stakeholders in this
situation.
b. What are the ethical issues involved?
Changing the salvage values and the estimated lives of the asset is the ethical issue. These
changes will result in misrepresented financial statements. This situation would not give
potential investors an honest representation of the business financially.
c. What should Prior do?
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If Prior decides to sell the equipment, he needs to make sure he is using the correct
financial numbers. Regardless of the outcome, such as him or his staff losing their job,
reporting the correct numbers of any sold assets is the ethical thing to do.

P12-2 (LO1,2,4,5) EXCEL (Accounting for Patents) Fields Laboratories holds a valuable
patent (No. 758-6002-1A) on a precipitator that prevents certain types of air pollution. Fields
does not manufacture or sell the products and processes it develops. Instead, it conducts research
and develops products and processes which it patents, and then assigns the patents to
manufacturers on a royalty basis. Occasionally it sells a patent. The history of Fields patent
number 758-6002-1A is as follows.

Date Activity Cost

2008–2009 Research conducted to develop precipitator $384,000
Jan. 2010 Design and construction of a prototype 87,600
March 2010 Testing of models 42,000
Jan. 2011 Fees paid engineers and lawyers to prepare patent application; patent 59,500
granted June 30, 2011
Nov. 2012 Engineering activity necessary to advance the design of the precipitator 81,500
to the manufacturing stage
Dec. 2013 Legal fees paid to successfully defend precipitator patent 42,000
April 2014 Research aimed at modifying the design of the patented precipitator 43,000
July 2018 Legal fees paid in unsuccessful patent infringement suit against a 34,000
competitor

Fields assumed a useful life of 17 years when it received the initial precipitator patent. On
January 1, 2016, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1, and no amortization for the year
if the cost is incurred after June 30. The company's year ends December 31.

Instructions

Compute the carrying value of patent No. 758-6002-1A on each of the following dates:
(a) December 31, 2011 (b) December 31, 2015 (c) December 31, 2018.

A) December 31, 2011

Costs to obtain patent, January, 2011 59,500
2011 Amortization (3,500)
Carrying value, December 31, 2011 56,000

B) December 31, 2015

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January 1, 2012 carrying value of patent 56,000

2012 amortization (3,500)
2013 amortization (3,500) (7,000)
Subtotal 49,000
December 2013 legal fees to defend patent 42,000
Carrying value December 31, 2013 91,000
2014 Amortization (6,500)
2015 Amortization (6,500) (13,000)
Carrying Value December 31, 2015 $78,000

C) December 31, 2018

January 1, 2016 Carrying value 78,000
2016 Amortization (15,600)
2017 Amortization (15,600)
2018 Amortization (15,600) (46,800)
December 31, 2018 Carrying value 31,200