1. Capitalizing acquisition costs
Gibbs Manufacturing Co. was incorporated on 1/2/17 but was unable to begin manufacturing activities until 8/1/17 because new factory facilities were not completed until that date. The Land and Buildings account at 12/31/17 per the books was as follows:
Date Item Amount
1/31/17 Land and dilapidated building $200,000
2/28/17 Cost of removing building 4,000
4/1/17 Legal fees 6,000
5/1/17 Fire insurance premium payment 5,400
5/1/17 Special tax assessment for streets 4,500
5/1/17 Partial payment of new building construction 210,000
8/1/17 Final payment on building construction 210,000
8/1/17 General expenses 30,000
12/31/17 Asset write-up 75,000
$744,900
Additional information:
1. To acquire the land and building on 1/31/17, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a fair value per share of $180.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
$6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2017.
5. General expenses covered the following for the period 1/2/17 to 8/1/17.
President's salary $20,000
Plant superintendent covering supervision of new building 10,000
$30,000
6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.
Instructions - Determine the proper balances as of 12/31/17 for a separate land account and a separate buildings account. Use separate T-accounts (one for land and one for buildings) labeling all the relevant amounts.
2. Nonmonetary exchange
Hodge Co. exchanged Building 24, which has an appraised value of $6,400,000, a cost of $10,120,000, and accumulated depreciation of $4,800,000 for Building M belonging to Fine Co. Building M has an appraised value of $6,016,000, a cost of $12,040,000, and accumulated depreciation of $6,336,000. The correct amount of cash was also paid. Assume depreciation has already been updated.
Instructions - Prepare the entries on Hodge Co.'s books assuming the exchange had no commercial substance.
3. Capitalized Interest
Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.
Using the FASB codification, answer the following questions (you must quote from the codification and include the section/paragraphs to receive credit).
a. What are the objectives for capitalizing interest?
b. Which assets qualify for interest capitalization?
c. Is there a limit to the amount of interest that may be capitalized in a period?
d. If interest capitalization is allowed, what disclosures are required?