Question

#1.Stargazer Company was incorporated on January 1, 2015 but was unable to begin manufacturing activities until July 1, 2015, because new factory facilities were not completed until that date. The Land and Building account reported the following items during 2015:

January 31                                                       Land and buildings                          $160,000

February 28                                                     Cost of removal of building                 9,800

May 1                                                              Partial payment of new construction     60,000

May 1                                                              Legal fees paid                                     3,770

June 1                                                              Second payment on new construction 40,000

June 1                                                              Insurance premium                              2,280

June 1                                                              Special tax assessment                          4,000

June 30                                                            General expenses                                 36,300

July 1                                                               Final payment on new construction     30,000

December 31                                                   Asset write up                                      53,800

                                                                                                                                    399,950

December 31                                                   Depreciation – 2015 at 1%                  (4,000)

December 31, 2015                                         Account balance                                  395,950

The following additional information is to be considered:

1. To acquire land and building, the company paid $80,000 cash and 800 shares of its 8% cumulative preferred stock, par value $100 per share. Fair value of the stock is $117 per share.

2. Cost of removal of old buildings amounted to $9,800, and the demolition company retained all materials of the building.

3. Legal fees covered the following:

Cost of organization $610

Examination of title covering purchase of land1,300

Legal work in connection with construction contract1,860

                                                                                    3,770

4. Insurance premium covered the building for a 2 year term beginning May 1, 2015.

5. The special tax assessment covered street improvements that are permanent in nature.

6. General expenses covered the following for the period from Jan 1 to June 30, 2015.

President’s salary$32,100

Plant superintendent’s salary – supervision of new building4,200

                                                                                                36,300

7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building $53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8. Estimated life of building – 50 years. Depreciation for 2015 – 1% of asset value (1% of $400,000 or $4,000)

Provide entries to reflect correct land, buildings and depreciation accounts at December 31, 2015. I would recommend you show detailed calculations to receive partial credit.

Answer 1

correcting entries		dr	cr
1	land	173600					land
	cash		80000			173600
	preference share capital		80000			9800
	APIC		13600			1300
						4000
2	land	9800			closing balance	188700
	cash		9800
							building
3	land	1300				1860
	cash		1300			4200
						53800
3	building	1860				130000
	cash		1860		closing balance	189860
5	land	4000
	cash		4000			depreciation= 1% of 189860 =			1899
6	building	4200					Depreciation
	cash		4200		closing balance	1899
7	building	53800
	retained earnings		53800
	building	130000
	cash		130000		1-May	60000
					01-Jun	40000
					01-Jul	30000
					total payment for construction	130000

Excel formulas used:

correcting entries		dr	cr
1	land	173600					land
	cash		80000			173600
	preference share capital		80000			9800
	APIC		=17*800			1300
						4000
2	land	9800			closing balance	=SUM(G3:G6)
	cash		9800
							building
3	land	1300				1860
	cash		1300			4200
						53800
3	building	1860				130000
	cash		1860		closing balance	=SUM(G10:G13)
5	land	4000
	cash		4000			depreciation= 1% of 189860 =			=ROUND(G14*1%,0)
6	building	4200					Depreciation
	cash		4200		closing balance	1899
7	building	53800
	retained earnings		53800
	building	130000
	cash		130000		42125	60000
					43252	40000
					43282	30000
					total payment for construction	130000