Problem #1

Myers Manufacturing Co. was incorporated on 1/2/11 but was unable to begin manufacturing activities until 8/1/11 because new factory facilities were not completed until that date. The Land and Building account at 12/31/11 per the books was as follows:

  Date                                  Item                                                                           Amount           

1/31/11            Land and dilapidated building                                                           $200,000

2/28/11            Cost of removing building                                                                  4,000

4/1/11              Legal fees                                                                                      6,000

5/1/11              Fire insurance premium payment                                                        5,400

5/1/11              Special tax assessment for streets                                                     4,500

5/1/11              Partial payment of new building construction                                       150,000

8/1/11              Final payment on building construction                                               150,000

8/1/11              General expenses                                                                            30,000

12/31/11          Asset write-up                                                                                75,000

                                                                                                                          $624,900

Additional information:

1.   To acquire the land and building on 1/31/11, 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 market value per share of $170.

2.   When the old building was removed, Myers 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, 2011.

5.   General expenses covered the following for the period 1/2/11 to 8/1/11.

            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 12/31/11 for a separate land account and a separate building account. Use separate T-accounts (one for land and one for building) labeling all the relevant amounts and disclosing all computations.

Problem #2

Equipment that cost $80,000 and has accumulated depreciation of $63,000 is exchanged for similar equipment with a fair value of $35,000 and $15,000 cash is received. The exchange lacked commercial substance.

Instructions

(a)   Show the calculation of the gain to be recognized from the exchange.

(b)   Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment.