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Case 1 Capitalizing vs. Expensing. Consider each of the items below.

Case 1

Capitalizing vs. Expensing.
Consider each of the items below. Place the proper letter in the blank space provided to indicate the nature of the account or accounts to be debited when recording each transaction using the preferred accounting treatment. Prepayments should be recorded in balance sheet accounts. Disregard income tax considerations unless instructed otherwise.

a. asset(s) only
b. accumulated depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts

1. A motor in one of North Company’s trucks was overhauled at a cost of P6,000. It is expected that this will extend the life of the truck for two years.

2. Machinery which had originally cost P1,300,000 was rearranged at a cost of P4,500, including installation, in order to improve production.

3. Orlando Company recently purchased land and two buildings for a total cost of P350,000, and entered the purchase on the books. The P12,000 cost of razing the smaller building, which has an appraisal value of P62,000, is recorded.

4. Jantzen Company traded its old machine with a net book value of P300,000 plus cash of P700,000 for a new one which had a fair value of P900,000.

5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading and setting up a new P600,000 precision machine in the plant. The wages earned in this five-day period, P48,000, are recorded.

6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a cost of P130,000. As a result the insurance rate was decreased by 40%.

7. An improvement, which extended the life but not the usefulness of the asset, cost P60,000.

8. The attic of the administration building was finished at a cost of P30,000 to provide an additional office.

9. In March, the Lyon Theatre bought projection equipment on the installment basis. The contract price was P236,100, payable P56,100 down, and P22,500 a month for the next eight months. The cash price for this equipment was P225,300.

10. Lambert Company recorded the first year’s interest on 6% P100,000 ten-year bonds sold a year ago at 94. The bonds were sold in order to finance the construction of a hydroelectric plant. Six months after the sale of the bonds, the construction of the hydroelectric plant was completed and operations were begun. (Only cash interest, and not discount amortization, is to be considered.)

Case 2

Capitalizing acquisition costs.
Gibbs Manufacturing Co. was incorporated on 1/2/10 but was unable to begin manufacturing activities until 8/1/10 because new factory facilities were not completed until that date. The Land and Building account at 12/31/10 per the books was as follows:
Date Item Amount
1/31/10 Land and dilapidated building P200,000
2/28/10 Cost of removing building 4,000
4/1/10 Legal fees 6,000
5/1/10 Fire insurance premium payment 5,400
5/1/10 Special tax assessment for streets 4,500
5/1/10 Partial payment of new building construction 150,000
8/1/10 Final payment on building construction 150,000
8/1/10 General expenses 30,000
12/31/10 Asset write-up 75,000
P624,900
Additional information:
1. To acquire the land and building on 1/31/10, the company paid P100,000 cash and 1,000 ordinary shares of its (par value = P100/share) which is very actively traded and had a market value per share of P170.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. P4,000, but also received P1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization P2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
P6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2010.
5. General expenses covered the following for the period 1/2/10 to 8/1/10.
President's salary P20,000
Plant superintendent covering supervision of new building 10,000
P30,000
6. Because of the rising land costs, the president was sure that the land was worth at least P75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/10 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.

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