Page 434 - Accounting Principles (A Business Perspective)

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Demonstration problem
Demonstration problem A Cleveland Company purchased a 2-square-mile farm under the following terms:
cash paid, USD 486,000; mortgage note assumed, USD 240,000; and accrued interest on mortgage note assumed,

USD 6,000. The company paid USD 55,200 for brokerage and legal services to acquire the property and secure
clear title. Cleveland planned to subdivide the property into residential lots and to construct homes on these lots.
Clearing and leveling costs of USD 21,600 were paid. Crops on the land were sold for USD 14,400. A house on the
land, to be moved by the buyer of the house, was sold for USD 5,040. The other buildings were torn down at a cost
of USD 9,600, and salvaged material was sold for USD 10,080.
Approximately 6 acres of the land were deeded to the township for roads, and another 10 acres was deeded to
the local school district as the site for a future school. After the subdivision was completed, this land would have an

approximate value of USD 7,680 per acre. The company secured a total of 1,200 salable lots from the remaining
land.
Present a schedule showing in detail the composition of the cost of the 1,200 salable lots.
Demonstration problem B Calvin Company acquired and put into use a machine on 2010 January 1, at a
total cost of USD 45,000. The machine was estimated to have a useful life of 10 years and a salvage value of USD
5,000. It was also estimated that the machine would produce one million units of product during its life. The
machine produced 90,000 units in 2010 and 125,000 units in 2011.
Compute the amounts of depreciation to be recorded in 2010 and 2011 under each of the following:
a. Straight-line method.

b. Units-of-production method.
c. Double-declining-balance method.
d. Assume 30,000 units were produced in the first quarter of 2010. Compute depreciation for this quarter under
each of the three methods.

Solution to demonstration problem
Solution to demonstration problem A
CLEVELAND COMPANY
Schedule of Cost of 1,200 Residential Lots
Costs incurred:
Cash paid $486,000
Mortgage note assumed 240,000
Interest accrued on mortgage note
assumed 6,000
Broker and legal services 55,200
Clearing and leveling costs incurred 21,600
Tearing down costs 9,600 $818,400
Less proceeds from sale of:
Crops $ 14,400
House 5,040
Salvaged materials 10,080 29,520
Net cost of land to be subdivided into
1,200 lots $788,880
Solution to demonstration problem B
a. Straight-line method:
USD 45,000 – USD5,000
2010: =USD 4,000
10
USD 45,000 – USD5,000
2011: =USD 4,000
10

Accounting Principles: A Business Perspective 435 A Global Text