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Curriculum Center Browse Bibliography Build EPacket Pricing Structure Distribution Process Management Control in Nonprofit Organizations
 
Joanne Gotsinas (C)
Author(s):
Anthony, Robert N.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Intermediate
Pages: 3
Teaching Note: Available. 
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First Page and the Assignment Questions:
The general principle for arriving at the amount of a fixed asset that is to be capitalized is reasonably clear, but there certainly are a great many problems in applying this principle to specific situations.

Following this comment to her accounting instructor, Joanne Gotsinas then presented several real-life problems that were of concern to her based on some discussions in her accounting course..

  1. Suppose that the Bruce Manufacturing Company used its own maintenance crew to build an additional wing on its existing factory building. What would be the proper accounting treatment of the following items?
    1. Architects’ fees.
    2. The cost of snow removal during construction.
    3. Cash discounts earned for prompt payment on materials purchased for construction.
    4. The cost of building a combined construction office and toolshed that would be torn down once the factory wing had been completed.
    5. Interest on money borrowed to finance construction.
    6. Local real estate taxes for the period of construction on the portion of land to be occupied by the new wing.
    7. The cost of mistakes made during construction.
    8. The overhead costs of the maintenance department that include supervision; depreciation on buildings and equipment of maintenance department shops; heat, light, and power for these shops; and allocations of cost for such items as the cafeteria, medical office, and personnel department.
    9. The cost of insurance during construction and the cost of damages or losses on any injuries or losses not covered by insurance.
  2. Assume that the Archer Company bought a large piece of land, including the buildings thereon, with the intent of razing the buildings and constructing a combined hotel and office building in their place. The existing buildings consisted of a theater and several stores and small apartment buildings, all in active use at the time of the purchase.
    1. What accounting treatment should be accorded that portion of the purchase price considered to be the amount paid for the buildings that are subsequently razed?
    2. How should the costs of demolishing the old buildings be treated?
    3. Suppose that a single company had owned this large piece of land, including the buildings thereon and instead of selling to the Archer Company had decided to have the buildings razed and to have a combined hotel and office building constructed on the site for its own benefit. In what respect, if any, should the accounting treatment of the old buildings and the cost of demolishing them differ from your recommendations with respect to (a) and (b) above? Why? . . .

Assignment

  1. Give your “tentative answers” to each of the above issues. Illustrate the issue and your answer, whenever possible, with a numerical example.