Question: Oak Island, Inc. reported the following related to its December 31, 2014 balance sheet:
Buildings are depreciated using a 40 year life, the straight-line method, and no residual value.
Equipment is depreciated using a 7 year life, the sum-of-the-years'-digits method, with a residual value of 10% of the equipment's initial cost.
Trucks are depreciated using a 5 year life, the double-declining balance method, and a residual value of 20% of the trucks initial cost.
Early in 2015, Oak Island, Inc. purchased a parcel of land with a building for $200,000. The closing statement indicated the land value was $130,000 and the building value was $70,000. In addition, to acquire the land, Oak Island paid a $17,000 commission to a real estate agent.
Shortly after acquisition, the building was demolished at a cost of $21,000. Oak Island, Inc. plans to use this parcel of land to park equipment.
On April 1, 2015, Oak Island began construction of a new building on land that it has owned since 2013. Architectural plans were formalized on April 1, when the architect was paid $25,000. Excavation work began during the first week in April with payments made to the contractor as follows:
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Date of Payment
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Amount of Payment
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May 31, 2015
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$ 60,000
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October 31, 2015
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100,000
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January 30, 2016
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150,000
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Construction was completed on January 31, 2016 and the building was first occupied on that same day.
Oak Island, Inc. had no new borrowings directly associated with the new building but had the following debt outstanding:
10%, 5-year note payable of $250,000, dated January 1, 2013, with interest payable annually on January 1.
5%, 10-year bond issue of $1,000,000 sold at par on July 1, 2012, with interest payable annually on July 1.
At December 31, 2015, after recording depreciation, management became concerned that, due to changes in technology, the equipment may be impaired. Estimated future cash flows associated with the equipment are $240,000 and its estimated fair value is $205,000.
On February 1, 2016, Oak Island, Inc. exchanged its used trucks (original cost, $90,000) plus cash of $38,000 for two new trucks. The used trucks had a combined fair market value of $60,000 at the time of the transaction. The exchange lacks commercial substance.
On November 30, 2016, Oak Island, Inc. purchased land with an existing building for $540,000 by making a $200,000 down payment and signing a $340,000 note payable which carries interest at the rate of 10%, payable each November 30. The seller reported that the land and building had book values of $20,000 and $330,000, respectively, prior to the sale. An independent appraisal reported that the fair value of the land and building was $112,000 and $448,000, respectively, at the time of sale. At the point of acquisition, the estimated remaining useful life of the building was 30 years. Immediately after acquisition, the roof on the building was replaced at a cost of $40,000. The cost of the old roof is not known. Oak Island estimates that the replacement of the roof will increase the useful life of the building by 10 years.
Requirements:
Compute the book value for each of the above mentioned assets at December 31, 2015 and 2016.
Compute the income statement effects for 2015 and 2016 for each of the above mentioned transactions.
Round all computations to the nearest whole dollar.