Question

Capitalizing acquisition costs. (Critical Thinking and Writing Skills) Gibbs Manufacturing Ca. was incorporated on 1/2/20 but was unable to begin manufacturing activities until 8/1/20 because new factory faclities were not completed until that date. The Land and Bulldings account at 12/31/20 per the books was as follows: Additional infermation: 1. To acquire the land and buldine on 1/31/20, the company paid 5100,000 cash and 1,000 shares of its common stock (par value = $100/ share) which is very actively traded and had a fair value per share of $180. 2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material. 3. 4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2020. 5. General expenses covered the following for the period 1/2/20 to 8/1/20. President's salary Plant superintendent covering supervision of ntw bullding 6. Because of the rising land conts, the president war sure that the land was worth at least $75,000 more than what it cost the company. Instructions 1. Explain the accounting situation in Gibbs Manufocturing Co, general ledger felated to fixed assets. 2. How the situation is fix? 3. Explain the transaction of December 31, 2020 and present the correct accounting entry. 4. Determine the proper balances as of 12/31/20 for fined assets. Use separate T-accounts labeling all the relevant amounts and disclosing all computations.

Answer 1

To determine the accounting profit, one must subtract the total costs, including labor, capital, and materials from the sales revenue. In this case, subtracting the total costs of $950,000 from the sales revenue of $1 million yields an accounting profit of $50,000.

Step-by-step explanation:

The student has asked about calculating accounting profit, which involves deducting all costs from sales revenue. Given that the firm had sales revenue of $1 million and incurred costs for labor ($600,000), capital ($150,000), and materials ($200,000), the calculation for accounting profit is straightforward.

You subtract the total costs from the sales revenue to determine the firm's profit.

Here's how the calculation is done:

Sales Revenue: $1,000,000

• Total Costs: Labor ($600,000) + Capital ($150,000) + Materials ($200,000) = $950,000
• Accounting Profit: Sales Revenue ($1,000,000) - Total Costs ($950,000) = $50,000

Therefore, the firm's accounting profit is $50,000.