Question

Teradene Corporation purchased land as a factory site and contracted with Maxtor Construction to construct a factory. Teradene made the following expenditures related to the acquisition of the land, building, and equipment for the factory: (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):vc

Purchase price of the land $ 1,290,000
Demolition and removal of old building 89,000
Clearing and grading the land before construction 195,000
Various closing costs in connection with acquiring the land 51,000
Architect's fee for the plans for the new building 59,000
Payments to Maxtor for building construction 3,340,000
Equipment purchased 905,000
Freight charges on equipment 41,000
Trees, plants, and other landscaping 54,000
Installation of a sprinkler system for the landscaping 5,900
Cost to build special platforms and install wiring for the equipment 21,000
Cost of trial runs to ensure proper installation of the equipment 7,900
Fire and theft insurance on the factory for the first year of use 33,000

In addition to the above expenditures, Teradene purchased four forklifts from Caterpillar. In payment, Teradene paid $25,000 cash and signed a noninterest-bearing note requiring the payment of $79,000 in one year. An interest rate of 6% properly reflects the time value of money for this type of loan.

Required:
Determine the initial valuation of each of the assets Teradene acquired in the above transactions.

Land:
Building:
Equipment:
Land Improvements:
Fork Lifts:
Prepaid Insurance:

Answer 1

Teradene:

Initial valuation of each of the assets acquired in the above transactions.

Land: $1,290,000+89,000+195,000+51,000 = $1,625,000

Building: $59,000+3,340,000 = $3,399,000

Equipment: $905,000+41,000+21,000+7,900 = $974,900

Land Improvements: $54,000+5,900

Fork Lifts: $25,000+74,528.30 = $99,528.30

Prepaid Insurance: $33,000

Step-by-step explanation:

a) Fixed assets are tangible items or resources, e.g. plant and land, that are used to earn income. As capital assets, they appear on the balance sheet as property, plant and equipment (PP&E). The company is expected to hold onto them for more than a year.

b) Prepaid Insurance is not regarded as a fixed asset unlike other assets above. Prepaid Insurance is a current asset, since it is for one year and not above.

c) The Fork Lifts' value was determined by calculating the present value of the note payable of $79,000 with an interest rate of 6% in order to reflect the time value of money, and then adding this to the initial cash payment of $25,000.