Question : 4) Daniel Manufacturing Limited (DML) purchased a large lathe. The : 1888833

4) Daniel Manufacturing Limited (DML) purchased a large lathe. The invoice cost of the lathe was $6,200,000 but DML was able to get the price reduced to $5,800,000. The seller provided terms whereby if the entire amount was paid within 30 days a further discount of 3% was available. DML paid on the 25th day. Transportation of the machine cost DML $70,000. Insurance while in transit was $30,000. To encourage DML to purchase another machine, the manufacturer gave DML a $50,000 discount voucher on its next purchase of a similar machine. Workers were paid $45,000 to install the machine. Start-up and testing costs were $45,000. Unfortunately, during the installation, one of the workers accidentally damaged the machine, and it cost $15,000 to repair the damage. Non-refundable sales taxes paid were $700,000, however, later a sales tax rebate of $80,000 was received relating to this transaction. During installation, part of the plant had to be shut down; lost profit from the shutdown was $100,000.

Requirement:

For each expenditure, identify whether it should be included in the cost of the lathe or expensed. Briefly justify each of your responses.

5) Zach Co. Ltd. was incorporated on January 2, 2012, but was unable to begin their manufacturing operations immediately. The new factory facilities became available for use on July 1, 2012. During the start-up period, the company provisionally used a "Land and Factory Building" account to record the following transactions, in chronological order:

Jan 31	Purchase of land and building	$410,000
Feb 19	Cost of removing existing building	7,000
Mar 15	Proceeds from sale of scrap material from demolition	(1,500)
Mar 15	Partial payment on new construction	80,000
Mar 15	Legal fees paid (see note (i) below)	3,200
Apr 1	Second payment on new construction	80,000
Jun 3	Insurance premium (ii)	4,200
Jun 20	Special tax assessment (iii)	5,000
Jul 3	General expenses (iv)	38,000
Dec 31	Final payment on new construction	65,000
Dec 31	Asset write-up (v)	23,000
	Subtotal	713,900
Dec 31	Less depreciation for 2012 (vi)	(17,500)
	Account Balance	$696,400

Additional info

 

i. Legal fees of $3,200 covered the following:

Cost of incorporating the company	$ 600
Examination of title covering purchase of land	1,100
Legal work in connection with construction contract	1,500

ii. Insurance covered the building for a one-year term beginning Apri1 1, 2012.

iii. The special tax assessment covered repaving the street in front of the building.

iv. General expenses covered the following for the period January 2, 2012 to June 30, 2012.

President's salary	$34,000
Plant superintendent covering supervision of new building	4,000

v. The board of directors increased the value of the building by $23,000, believing that such an increase was justified to reflect the current market at the time the building was completed; Retained Earnings was credited for this amount.

vi. Engineers estimate the useful life of the building to be 40 years. The company believes that the declining balance method at a 5% rate is appropriate. The company's policy for new PPE is to depreciate the assets according to the time available for use in the fiscal year, rounded to the closest month.

 

Requirement:

Prepare entries to reflect correct land, factory building, and accumulated depreciation accounts at December 31, 2012. Round values to the nearest dollar, if necessary.