Problem
On July 1, 2016, Gero Corp, purchased a factory, including land, building, and machines for $2,500,000 from Millan Inc. In addition, Gero paid in cash 2% of the cost for taxes, $34,000 in legal fees and commisions, $152,000 for building renovation, and $42,000 to refurbish the machines. In making payment to Millan, Gero issued 20,000 ordinary shares at $50 per share, signed a $1,300,000, 4% note payable due June 30, 2021, with interest paid annually on the anniversary date, and the remaining balance will be paid to Millan on September 1, 2016. Millan provides a 2% discount for payments made within 30 days. Gero's year-end date is December 31.
Gero applies straight-line depreciation method on its capital assets. It estimated that the building would last 20 years with a residual value of $100,000, and machines 7 years with a residual value of $20,000.
Required:
2016:
1. Calculate the purchase cost of each capital asset, assuming the appraisal value shows that land worth 30%, building 60% and machines 10%.
2. Record the journal entries required related to the capital assets for 2016.
2017:
On October 2, Gero renovated the receiving area and paid $220,000. As a result the estimated residual value increased by $50,000 and the useful life by 3.25 years. Due to water contamination by the neighbouring factory, on December 31, Gero did an impariment test on Land. The amount of value in use was $450,000, and the fair value was $300,000.
3. Record all the journal entries for 2017.
2018:
On April 1, Gero replaced the old machines by selling them for $150,000.
4. Record the disposal of the machines.