CHAPTER 26: LAND, BUILDING AND MACHINERY

Problem 26-1 (AICPA Adapted)

At the beginning of current year, Bastard Company purchased for 4,500,000 a tract of land as
factory site.

An existing building on the property was razed and construction began on a new factory building
which was completed at year-end.

Cost of razing old building 300,000

Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building construction cost 8,000,000

1. What is the cost of factory building?

a. 9,250,000
b. 9,450,000
c. 8,950,000
d. 9,150,000

Solution:
Cost of razing old building 300,000
Architect fee 950,000
New building construction cost 8,000,000
Total cost of factory building 9,250,000

2. What is the cost of factory building?

a. 4,700,000
b. 5,000,000
c. 4,500,000
d. 4,800,000

Solution:
Purchase price 4,500,000
Title insurance and legal fees 200,000
Total cost of land 4,700,000

Problem 26-2 (AICPA Adapted)

Chameleon Company purchased a P4,000,000 tract of land as a factory site.

The entity razed an old building on the property and sold the materials it salvaged from the
demolition.
Demolition of old building 200,000
Legal fees for purchase contract and recording title 150,000
Title guarantee insurance 50,000
Proceeds from sale of salvaged materials 20,000

1. What is the initial carrying amount of land?

a. 4,200,000
b. 4,150,000
c. 4,050,000
d. 4,400,000
Solution:
Purchase price 4,000,000
Legal fees for purchase contract and recording title 150,000
Title guarantee insurance 50,000
Total cost of land 4,200,000

Problem 26-3 (AICPA Adapted)

During the current yea, Dauntless Company had the following transactions pertaining to the new
office building:

Purchase price of land as a building site 600,000

Legal fees for contract to purchase land 20,000
Architect fee 80,000
Demolition of old building 50,000
Sale of scrap from old building 30,000
Construction cost of new building 3,500,000

1. What amount should be reported for land?

a. 600,000
b. 620,000
c. 640,000
d. 670,000

2. What amount should be reported for building?

a. 3,520,000
b. 3,600,000
c. 3,500,000
d. 3,620,000

Solution:
Land Building
Purchase price of land as a building site 600,000
Legal fees for contract to purchase land 20,000
Architect fee 80,000
Demolition of old building 50,000
Sale of scrap from old building (30,000)
Construction cost of new building 3,500,000
Total 620,000 3,600,000
Problem 26-4 (IAA)
At the beginning of the current year, Newman Company purchased a parcel of land as a factory
site for P1,000,000.

An old building on the property was demolished and construction began on a new building
which was completed at year-end.

Demolition of old building 100,000

Architect fee 175,000
Legal fee for title investigation and purchase contract 25,000
Construction cost 5,450,000
Salvaged materials resulting from demolition 50,000

What amount should be recorded as cost of building?

a. 5,675,000
b. 5,650,000
c. 5,625,000
d. 5,725,000
Solution:
Land Building
Purchase price of land as factory site 1,000,000
Demolition of old building 100,000
Architect fee 175,000
Legal fee for title investigation and purchase contract 25,000
Construction cost 5,450,000
Salvaged materials resulting from demolition (50,000)
Total 1,025,000 5,675,000

Problem 26-5 (IAA)

Nicko Company purchased a tract of land as a factory site. An old building was demolished and
construction began on the new building.
Purchase price of land and old building 4,500,000
Fair value of old building 250,000
Cost of demolishing old building 300,000
Title insurance and legal fees to purchase land 200,000
Architect fee 950,000
New building and construction cost 8,000,000
Survey before construction 100,000
Building permit or payment to city hall for approval of building construction 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
New fence surrounding the new building 100,000
Driveway, parking bay and safety lighting 550,000
Cost of trees, shrubs and other landscaping 300,000
Cost of lighting and signage 100,000
1. What is the cost of the land?

a. 4,550,000
b. 4,800,000
c. 4,850,000
d. 4,450,000

Solution:
Purchase price of land and old building 4,500,000
Fair value of old building
(250,000)
Purchase price of land 4,250,000
Title insurance and legal fees to purchase land 200,000
Survey before construction 100,000
Cost of land 4,550,000

2. What is the cost of the new building?

a. 9,700,000
b. 9,750,000
c. 9,800,000
d. 9,950,000

Solution:
New building and construction cost 8,000,000
Cost of demolishing old building 300,000
Architect fee 950,000
Building permit 150,000
Excavation before new construction 200,000
Liability insurance during construction 100,000
Cost of new building 9,700,000

3. What is the cost of land improvements?

a. 950,000
b. 650,000
c. 850,000
d. 400,000

Solution:
New fence surrounding the new building 100,000
Driveway, parking bay and safety lighting 550,000
Cost of trees, shrubs and other landscaping 300,000
Cost of land improvements 950,000
Problem 26-6 (IAA)
Enchantment Company incurred the following expenditures related to land and building:

Cash paid for land and dilapidated building 1,000,000

Removal of old building to make room for construction of a new building 50,000
Payment to tenants for vacating old building 15,000
Architect fee for new building 200,000
Building permit for new construction 30,000
Fee for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by city for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Driveways and walks to new building from street (part of building plan) 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of changes during construction to make new building more energy efficient 50,000
Cost of windows broken by vandals 25,000

1. What is the cost of land?

a. 1,145,000
b. 1,215,000
c. 1,130,000
d. 1,080,000

2. What is the cost of new building?

a. 6,625,000
b. 6,575,000
c. 6,585,000
d. 6,560,000

Solution:
Land Building
Cash paid for land and dilapidated building 1,000,000
Removal of old building 50,000
Payment to tenants for vacating old building 15,000
Architect fee for new building 200,000
Building permit for new construction 30,000
Fee for title search 10,000
Survey before construction of new building 20,000
Excavation before new construction 100,000
New building constructed 6,000,000
Assessment by city for drainage project 5,000
Cost of grading, leveling and landfill 45,000
Driveways and walks to new building from street 40,000
Temporary quarters for construction crew 80,000
Temporary building to house tools and materials 60,000
Cost of construction changes 50,000
Cost of windows broken by vandals***
Total 1,080,000 6,625,000

***Treated as expense

Problem 26-7 (IAA)

Facetious Company incurred the following expenditures related to the construction of a new
home office:

Purchase price of land and an old apartment building 2,000,000

Fair value of land 1,800,000
Legal fees,including fee for title search 10,000
Payment of land mortgage and related interest due at time of sale 50,000
Payment of delinquent property taxes assumed 20,000
Cost of razing the apartment building 30,000
Grading and drainage on land site 15,000
Architect fee on new building 200,000
Payment to building contractor 8,000,000
Interest cost on specific borrowing during construction 300,000
Payment of medical bills of employees accidentally
injured while inspecting building construction 10,000
Cost of paving driveway and parking lot 40,000
Cost of trees,shrubs and other landscaping 55,000
Cost of installing lights in parking lot 5,000
Premium for insurance on building during construction 25,000
Cost of open house party to celebrate opening of building 60,000

1. What is the cost of land?

a. 2,120,000
b. 1,920,000
c. 1,895,000
d. 1,845,000

2. What is the cost of new building?

a. 8,555,000
b. 8,525,000
c. 8,540,000
d. 8,530,000
3. What is the cost of land improvement?

a. 300,000
b. 115,000
c. 100,000
d. 0

Solution:
Land Building Land
Improvemen
t
Fair value of land 1,800,000
Legal fees,including fee for title search 10,000
Payment of land mortgage 50,000
Payment of delinquent property taxes assumed 20,000
Cost of razing the apartment building 30,000
Grading and drainage on land site 15,000
Architect fee on new building 200,000
Payment to building contractor 8,000,000
Interest cost on specific borrowing 300,000
Cost of paving driveway and parking lot 40,000
Cost of trees,shrubs and other landscaping 55,000
Cost of installing lights in parking lot 5,000
Premium for insurance 25,000
Total 1,895,000 8,555,000 100,000

The payment for medical bills and the cost of open house party to celebrate opening of building
are outright expenses.

Problem 26-8 (IAA)

Generic Company purchased land for P2,000,000 as a plant site. There was a small office build-
ing on the land with fair value of P700,000 which the entity will continue to use with some mod-
ification and renovation.

The entity decided to construct a factory building and incurred the following costs:
Materials and supplies 3,000,000
Excavation 100,000
Labor on construction 2,500,000
Cost of remodeling old office building 200,000
Imputed interest on corporation’s own money used during construction 120,000
Cash discounts on materials purchased 60,000
Supervision by management during construction 70,000
Compensation insurance premiums for workers 20,000
Payment of claim for injuries not covered by insurance 25,000
Clerical and other expenses during construction 30,000
Paving of streets and sidewalks 40,000
Plans and specifications 140,000
Legal cost of conveying land 10,000
Legal cost of injury claim 15,000
Saving on construction 200,000

1. What is the cost of land?

a. 1,310,000
b. 1,300,000
c. 1,350,000
d. 1,410,000

2. What is the cost of office building?

a. 700,000
b. 900,000
c. 950,000
d. 850,000

3. What is the cost of factory building?

a. 5,720,000
b. 5,800,000
c. 5,920,000
d. 5,600,000

Solution:
Land Office Factory
Building Building
Purchase price 1,300,000 700,000
Materials and supplies 3,000,000
Excavation 100,000
Labor on construction 2,500,000
Cost of remodeling old office building 200,000
Cash discounts on materials purchased (60,000)
Supervision by management during construction 70,000
Compensation insurance premiums for workers 20,000
Clerical and other expenses during construction 30,000
Plans and specifications 140,000
Legal cost of conveying land 10,000
Total 1,310,000 900,000 5,800,000

1. The imputed interest on corporation’s own money used during construction is not
capitalizable.
2. The payment of claim for injuries not covered by insurance and the legal cost of injury claim
are treated as expenses.
3. Saving on construction is not recognized.
Problem 26-9 (AICPA Adapted)
At the beginning of current year, Melancholy Company reported the following property, plant
and equipment:

Land 3,500,000
Land improvements 900,000
Building 6,000,000
Equipment 1,500,000

The following transactions occurred during the current year:

* A tract of land was acquired for P1,250,000 and intended definitely for use as future building
site.

* A plant facility consisting of land and building was acquired from another entity in exchange
for 100,000 Melancholy Company shares.

On the acquisition date, the share had a closing market price of P45 on a stock exchange.

The plant facility was carried at P1,000,000 for land and P3,000,000 for the building at the ex-
change date.

Current appraised values for the land and building, respectively, are P1,200,000 and P2,400,000.

* Expenditures totaling P750,000 were made in early part of the year for new parking lot, street
and sidewalk at the entity's various plant locations. These expenditures had an estimated useful
life of 15 years

* Equipment was purchased at a cost of P3,000,000. Freight and unloading charge of P50,000
and installation cost of P350,000 were incurred.

* At the middle of the current year, an equipment was sold for P175,000. The original cost of the
equipment acquired two years ago was P500,000. The equipment was depreciated on the straight
line basis over an estimated useful life of five years and no residual value.
1. What is the total cost of land at year-end?

a. 6,250,000
b. 5,950,000
c. 5,750,000
d. 9,250,000

2. What is the total cost of building at year-end?

a. 8,400,000
 b. 9,000,000
c. 8,250,000
d. 8,500,000
3. What is the total cost of land improvement at year-end?

a. 1,650,000
b. 900,000
c. 750,000
d. 800,000

Solution:
Land Building Land
Improvemen
t
Balances, January 1 3,500,000 6,000,000 900,000
Land acquired 1,250,000
Issuance of share capital: (100,000 shares@45)
12/36 x 4,500,000 1,500,000
24/36 x 4,500,000 3,000,000
New parking lot, street and sidewalk 750,000
Balances, December 31 6,250,000 9,000,000 1,650,000

4. What is the total cost of equipment at year-end?

a. 4,600,000
b. 3,400,000
c. 4,900,000
d. 4,400,000

Solution:
Balance of equipment - January 1 1,500,
000
Equipment purchased 3,000,
000
Freight and unloading charge 50,000
Installation cost 350,00
0
Equipment sold (500,0
00)
Total cost of equipment 4,400,
000

Problem 26-10 (AICPA Adapted)

At the beginning of the current year, Rock Company reported the following balances:

Land 2,200,000
Building 6,500,000

During the current year, the following transactions occurred:

*A piece of land was acquired for P1,600,000.

To be able to acquire the land, P175,000 was paid to a real estate agent, and P 50,000 was
incurred to clear the land.

During the course of clearing the land, timber and gravel were recovered and sold for P 25,000.

*A second piece of land with a building was acquired for P4,500,000.

The appraiser valued the land at P2,000,000 and the building at P1,000,000.

Shortly after acquisition, the building was demolished at a cost of P100,000.

A new building was constructed at a cost of P5,000,000 plus excavation fee P50, 000, architect
fee P80,000 and building permit P70,000.

*A third piece of land was acquired for P2,000,000 and was held for undetermined use.

1. What total cost of land should be reported in the statement of financial position under
property, plant and equipment?

a. 8,500,000
b. 7,000,000
c. 7,100,000
d. 8,600,000

Solution:
Balance of land account - January 1 2,200,000
First piece of land acquired:
Cost 1,600,000
Payment of real estate agent 175,000
Cost of clearing land 50,0000
Timber and gravel recovered (25,000) 1,800,000
Second piece of land acquired 3,000,000**
Total cost of land under property, plant and equipment 7,000,000

Second piece of land with an old building:

Land 2,000,000
Old building 1,000,000
Total appraised value 3,000,000

Allocated cost:
 Land (4,500,000 x 2/3)** 3,000,000
Old building (4,500,000 x 1/3) 1,500,000
Total purchase price 4,500,000

The third piece of land acquired for 2,000,000 and was held for undetermined use is classified as
investment property.

2. What is the cost of new building?

a. 5,200,000
b. 5,300,000
c. 6,800,000
d. 6,700,000

Solution:
Demolition of old building 100,000
New construction cost 5,000,000
Excavation fee 50,000
Architect fee 80,000
Building permit 70,000
Total cost of new building 5,300,000

Problem 26-11 (IAA)

Paragon Company incurred the following costs during the current year in relation to
property, plant and equipment:

Cash paid for purchase land

2,500,000
Mortgage assumed on the land purchased, including interest accrued
1,000,000
Realtor commission
300,000
Legal fees, realty taxes and documentation expenses
50,000
Amount paid to relocate persons squatting on the property
100,000
Cost of tearing down an old building on the land to make
room for construction of new building
200,000
Salvage value of the old building demolished
50,000
Cost of fencing property after completion
110,000
 Amount paid to the contractor for the building constructed
5,000,000
Building permit fee
50,000
Excavation
50,000
Architect fee
200,000
Interest that would have been earned had the money used
during the period of construction been invested
150,000
Invoice cost of machine acquired
2,000,000
Freight, unloading and delivery charges
60,000
Customs duties and other charges
140,000
Allowances and hotel accommodation, paid to foreign
technicians during installation and test run of machine
400,000
1. What amount should be capitalized as cost of land?

a. 3,950,000
b. 4,100,000
c. 3,850,000
d. 3,800,000

Solution:
Cash paid for purchase land
2,500,000
Mortgage assumed on the land purchased, including interest accrued
1,000,000
Realtor commission
300,000
Legal fees, realty taxes and documentation expenses
50,000
Amount paid to relocate persons squatting on the property
100,000
Total cost of land 3,950,000

2. What amount should be capitalized as cost of building?

a. 5,300,000
b. 5,410,000
c. 5,450,000
d. 5,560,000
Solution:
Cost of tearing down an old building on the land to make
room for construction of new building
200,000
Salvage value of the old building demolished
(50,000)
Amount paid to the contractor for the building constructed
5,000,000
Building permit fee
50,000
Excavation
50,000
Architect fee
200,000
Total cost of the building
5,450,000

3. What amount should be capitalized as cost of machine?

a. 2,600,000
b. 2,000,000
c. 2,200,000
d. 2,560,000

Solution:
Invoice cost of machine acquired
2,000,000
Freight, unloading and delivery charges
60,000
Customs duties and other charges
140,000
Allowances and hotel accommodation, paid to foreign
technicians during installation and test run of machine
400,000
Cost of the machine
2,600,000

The cost of fencing property after completion is classified as land improvement.

Problem 26-12 (AICPA Adapted)

On January 1, 2020, Lazarus Company reported the following property, pant and
equipment and transactions during the current year:

Land
1,500,000
Building
4,000,000
Leasehold improvements
500,000

a. Land site number 621 was acquired for P3,000,000.

Additionally, to acquire the land the entity paid a P60,000 commission to a real state
agent.
Cost of P15,000 was incurred to clear the land for the intended use but not to make room
for the construction of a new building. During the course of clearing the land, timber and
gravel were recovered and sold for P5,000.

b. A second tract of land site number 622 with a building was acquired for P4,000,000.
The closing statement indicted that the land fair value was P2,500,000 and the building
fair value was P1,500,000. Shortly after acquisition, the building was demolished at a
cost of P300,000 to make room for the construction of a new building.

c. A third tract of land site number 623 was acquired for P2,000,000 and was classified as
held for sale.

d. Extensive work was done to a building occupied by the entity under a lease agreement
that expires on December 31, 2026. The total cost of the work was P1,250,000 which
consisted of the following:

Painting and ceiling

100,000
Electrical work with useful life of 10 years
350,000
Construction of extension to current working area with useful life of 15 years
800,000

The lessor paid one-half of the cost incurred in connection with the extension to the
current working area.

e. During December 2020, an amount of P650,000 was incurred to improve leased office
space. The related lease will terminate on December 31, 2022 and it not expected to be
removed.

f. The new building on the second tract of land was constructed for P5,000,000 plus the
following costs:
Excavation fee 50,000
Architectural design fee
150,000
Building permit
40,000
Imputed interest on funds used during construction
500,000

1. What total cost of land should be reported on December 31, 2020 under property, plant and
equipment?

a. 7,070,000
b. 7,060,000
c. 7,370,000
d. 7,000,000

2. What total cost of building should be reported on December 31, 2020?

a. 9,000,000
b. 9,540,000
c. 9,240,000
d. 9,490,000

3. What total cost of leasehold improvements should be reported on December 31, 2020?

a. 2,300,000
b. 1,250,000
c. 1,900,000
d. 1,500,000

Solution:
Land Building Leasehold
Improvemen
t
Balance - January 1 1,500,000 4,000,000 500,000
Land site 621:
Cost 3,000,000
Commission 60,000
Cost of clearing land 15,000
Timber and gravel recovered (5,000) 3,070,000
Land site 622:
Fair value of land 2,500,000
Demolition of building 300,000
New construction cost 5,000,000
Excavation fee 50,000
Architectural design fee 150,000
Building permit 40,000
Leasehold Improvement:
Electrical work 350,000
Construction of extension (800,000/2) 400,000
Improvement on lease office space 650,000
7,070,000 9,540,000 1,900,000

A third tract of land site number 623 held for sale is treated as part of inventory.

Problem 26-13 (IFRS)

Wisdom Company is installing a new equipment at the production facility and incurred
the following costs:

Cost of equipment per supplier’s invoice 2,500,000

Initial delivery and handling cost
200,000
Cost of site preparation
600,000
Consultant used for advise on the acquisition of equipment
700,000
Interest charges paid to supplier for deferred credit
200,000
Estimated dismantling cost to be incurred as required by contract 300,000
Operating loss before commercial production
400,000

What total amount should be capitalized as cost of the equipment?

a. 4,300,000
b. 4,000,000
c. 4,200,000
d. 4,500,000

Solution:
Cost of equipment per supplier’s invoice 2,500,000
Initial delivery and handling cost
200,000
Cost of site preparation
600,000
Consultant used for advise on the acquisition of equipment
700,000
Estimated dismantling cost to be incurred as required by contract 300,000
Cost of the equipment
4,300,000
The estimated dismantling cost is capitalized because it is required by contract.

Problem 26-14 (IFRS)

Repertoire Company acquired a machine and incurred the following costs:

Cash paid for machine, including VAT of 96,000

896,000
Cost of transporting machine
30,000
Labor cost of installation by expert fitter
50,000
Labor cost of testing machine
40,000
Insurance cost for the current year
15,000
Cost of training for personnel who will use the machine
25,000
Cost of safety rails and platform surrounding machine
60,000
Cost of water device to keep machine cool
80,000
Cost of adjustment to machine to make it operate more efficiently
75,000
Estimated dismantling cost to be incurred as required by contract
65,000

What total amount should be capitalized as cost of the machine?

a. 1,135,000
b. 1,231,000
c. 1,200,000
d. 1,150,000

Solution:
Cash paid for machine (896,000 - 96,000)
800,000
Cost of transporting machine
30,000
Installation cost
50,000
Testing cost
40,000
 Cost of safety rails and platform surrounding machine
60,000
Cost of water device to keep machine cool
80,000
Cost of adjustment to machine to make it operate more efficiently
75,000
Estimated dismantling cost to be incurred as required by contract
65,000
Total cost of the machine
1,200,000

The recoverable VAT or value added tax is not capitalizable.

The cost of training personnel who will operate the machine should be treated as
expense.
Note that the estimated dismantling cost is capitalized because the entity has a present
obligation as required by contract. In the absence of a present obligation, the estimated
dismantling cost is not capitalized.

Problem 26-15 (IAA)

During the current year, Sacrosanct Company purchased a second-hand machine at a
price of P3,200,000.

A cash payment of P500,000 was made and a two-year, noninterest bearing note was
issued for the balance.

Recent transactions involving similar machinery indicate that the used machine has a fair
value of P2,400,000. A new machine would cost P4,000,000.
The following costs were incurred during the year:
Cost of removing old machine that is replaced
30,000
Cash proceeds from sale of the old machine replaced
10,000
General overhaul and repairs to recondition machine prior to use
150,000
Cost of spare parts to cover breakdowns
200,000
Cost of installation
80,000
Cost of testing machine prior to use
110,000
Cost of hauling machine from vendor to entity premises
10,000
Cost of repairing damage to machine caused when machine
was dropped during installation
30,000
 Repairs incurred during first year of operations
90,000
Safety device added to the machine
250,000
Cost of training workers to operate the machine
20,000
What total amount should be capitalized as cost of the second hand machine?

a. 3,000,000
b. 2,750,000
c. 3,200,000
d. 3,800,000

Solution:
Second-hand machine market value
2,400,000
General overhaul and repairs to recondition machine prior to use
150,000
Cost of installation
80,000
Cost of testing machine prior to use
110,000
Cost of hauling machine from vendor to entity premises
10,000
Safety device added to the machine
250,000
Cost of the second-hand machine
3,000,000

Problem 26-16 (IAA)

Reverend Company acquired a new processing machine at the beginning of current year.
Invoice cost - terms 5/10, n/30 1,600,000
Cost of transportation
50,000
Cost of installation
50,000
Payment for strengthening the floor to support the weight of the new machine
150,000

The chief engineer spent two-thirds of his time during trial run of the new machine, the
monthly salary is P60,000.

During the year, the entity was granted a cash allowance of P100,000 by the supplier
because the machine proved to be of less than standard performance capability.
 The operator of the old machine who was laid off due to the acquisition of the new
machine was paid a gratuity of P30,000.
What amount should be capitalized as cost of the new machine?

a. 1,560,000
b. 1,640,000
c. 1,710,000
d. 1,590,000

Solution:
Invoice cost 1,600,000
Discount (1,600,000 x 5%)
(80,000)
Cost of transportation
50,000
Cost of installation
50,000
Salary of chief engineer (60,000 x 2/3)
40,000
Cost allowance
(100,000)
Total cost
1,560,000
Problem 26-17 (AICPA Adapted)
During the current year, Quean Company made the following expenditures relating to the
plant building:

Continuing and frequent repairs

400,000
Repainting of the plant building
100,000
Major improvements to the electrical wiring system
300,000
Partial replacement of the roof tiles
150,000

What total amount should be charged to repair and maintenance expense in the current year?

a. 950,000
b. 800,000
c. 650,000
d. 550,000

Solution:
Continuing and frequent repairs
400,000
 Repainting of the plant building
100,000
Partial replacement of the roof tiles
150,000

650,000

Problem 26-18 (AICPA Adapted)

During the current year, Prestigious Company installed a production assembly line to
manufacture furniture.

In the current year, the entity purchased a new machine and improved the assembly line
to install the machine.

The improvement did not increase the estimated useful life of the assembly line, but it did
result in significant increase in production.

The following expenditures were incurred in connection with the project:

Machine
750,000
Labor to install machine
140,000
Parts added in improving the assembly line to provide future benefits
400,000
Labor and overhead to improve the assembly line
180,000

What total amount should be capitalized?

a. 1,470,000
b. 1,070,000
c. 890,000
d. 750,000

Solution:
Machine
750,000
Labor to install machine
140,000
Parts added in improving the assembly line to provide future benefits
400,000
Labor and overhead to improve the assembly line
180,000
1,470,000
Problem 26-19 (AICPA Adapted)
During the current year, Printable Company incurred the following costs for a printing
press:

Purchase of collating and stapling attachment

840,000
Installation of attachment
360,000
Replacement parts of overhaul of press
260,000
Labor and overhead in connection with overhaul
140,000

The overhaul resulted in a significant increase in production. Neither the attachment nor
the overhaul increased the estimated useful life of the press.

What total amount should be capitalized?

a. 1,600,000
b. 1,200,000
c. 840,000
d. 0

Solution:
Purchase of collating and stapling attachment
840,000
Installation of attachment
360,000
Replacement parts of overhaul of press
260,000
Labor and overhead in connection with overhaul
140,000

1,600,000
Problem 26-20 (IAA)
Prudent Company incurred the following expenditures:

Painting in a large room recently divided into four sections

50,000
Labor cost of tearing down a wall to permit extension of an assembly line
200,000
Major replacement of the motor of the machine
This replacement was anticipated when the machine was purchased
500,000
Cost of grading land prior to construction
600,000
 Dust filters in the interior of the factory were replaced
The new filters are expected to reduce employee health hazards
800,000

What total amount should be capitalized?

a. 2,150,000
b. 1,950,000
c. 1,900,000
d. 1,400,000

Solution:
Painting in a large room recently divided into four sections
50,000
Major replacement of the motor of the machine
500,000
Cost of grading land prior to construction
600,000
Dust filters in the interior of the factory were replaced
800,000
Total capital expenditures
1,950,000

Problem 26-21 (IAA)

Queer Company provided the following charges to the repair and maintenance account:

Service contract on office equipment

100,000
Initial design fee for proposed extension of office building
150,000
New condenser for central air conditioning unit
10,000
Purchase of executive chairs and desks
200,000
Purchase of storm windows and screens and their
installation on all office windows
500,000
Sealing of roof leaks in production area
80,000
Replacement of door to production area
50,000
 Installation of automatic door-opening system
200,000
Overhead crane for assembly department to speed up production
350,000
Replacement of broken gear on machine
60,000

What total amount of expenditures should be capitalized?

a. 1,400,000
b. 1,200,000
c. 1,500,000
d. 1,410,000

Solution:
Initial design fee for proposed extension of office building
150,000
Purchase of executive chairs and desks
200,000
Purchase of storm windows and screens
500,000
Installation of automatic door-opening system
200,000
Overhead crane for assembly department to speed up production
350,000
Total capital expenditures
1,400,000