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Question 5ISTQ

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 262

Short Answer

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense.

(b) property, plant, and equipment.

(c) an intangible asset.

(d) a long-term investment.

The correct option is (d) a long-term investment.

See the step by step solution

Step by Step Solution

Definition of Investment

Investment can be defined as the resource held to generate capital gain. It includes any fixed asset such as land or any other asset.

The Explanation for Correct Option

Land will be reported as a long-term investment because it will remain idle for five years, and it might be possible that the company will sell such land to generate capital gain.

The Explanation for Incorrect Options

(a) Land acquired by the business entity is an asset, not an expense; therefore, this option is incorrect.

(b) Land cannot be reported in property, plant, and equipment because the land will remain idle for five years.

(c) Land has physical existence and therefore cannot be reported as an intangible asset.

Most popular questions for Business-studies Textbooks

P5-5 (L03) GROUPWORK (Balance Sheet Adjustment and Preparation) Presented below is the balance sheet of Sargent Corporation for the current year, 2017.

SARGENT CORPORATION

Balance Sheet

December 31, 2017

Current assets

$485,000

Current liabilities

$380,000

Investment

640,000

Long-term liabilities

1,000,000

Property, Plant, and Equipment

1,720,000

Stockholder’s equity

1,770,000

Intangible assets

305,000

$3,150,000

$3,150,000

The following information is presented.

1. The current assets section includes cash $150,000, accounts receivable $170,000 less $10,000 for allowance for doubtful accounts, inventories $180,000, and unearned rent revenue $5,000. Inventory is stated on the lower-of-FIFO-cost-or-net realizable value.

2. The investments section includes the cash surrender value of a life insurance contract $40,000; investments in common stock, short-term $80,000 and long-term $270,000; and bond sinking fund $250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings $1,040,000 less accumulated depreciation $360,000, equipment $450,000 less accumulated depreciation $180,000, land $500,000, and land held for future use $270,000.

4. Intangible assets include a franchise $165,000, goodwill $100,000, and discount on bonds payable $40,000.

5. Current liabilities include accounts payable $140,000, notes payable—short-term $80,000 and long-term $120,000, and income taxes payable $40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2025.

7. Stockholders’ equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for $450,000; and common stock, $1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of $10. In addition, the corporation has retained earnings of $320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.

(Classification of Balance Sheet Accounts) Assume that Fielder Enterprises uses the following headings on its balance sheet.

(a) Current assets

(g) Long-term liabilities

(b) Investments

(h) Capital stock

(c) Property, plant, and equipment

(i) Equity attribute to non-controlling interest

(d) Intangible assets

(i) paid-in-capital in excess of par

(e) Other assets

(k) Retained earnings

(f) Current liabilities

Instructions

Indicate by letter how each of the following usually should be classified. If an item should appear in a note to the financial statements, use the letter “N” to indicate this fact. If an item need not be reported at all on the balance sheet, use the letter “X.”

1. Prepaid insurance.

2. Stock owned in affiliated companies.

3. Unearned service revenue.

4. Advances to suppliers.

5. Unearned rent revenue.

6. Preferred stock.

7. Additional paid-in capital on preferred stock.

8. Copyrights.

9. Petty cash fund.

10. Sales taxes payable.

11. Accrued interest on notes receivable.

12. Twenty-year issue of bonds payable that will mature within the next year. (No sinking fund exists, and refunding is not planned.)

13. Machinery retired from use and held for sale.

14. Fully depreciated machine still in use.

15. Accrued interest on bonds payable.

16. Salaries that company budget shows will be paid to employees within the next year.

17. Discount on bonds payable. (Assume related to bonds payable in item 12.)

18. Accumulated depreciation—buildings.

19. Shares held by non-controlling stockholders.

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