2024 – Ch 10 Problems P10 2 Land Balance at December 31 2013 300 000 Plant facility acquired

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 31^st, 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).