Case 7-2 Joan Holtz
1. Everything should be included under asset’s cost except the cost of mistakes made during construction and losses not covered by insurance. These items should be expensed.
2.a. Since revenues are being earned from the existing buildings it is appropriate to charge depreciation on these buildings against these revenues in order to measure income. Although they are expected to be razed soon and the purpose of purchasing this building was not to earn income from the existing theatre, therefore only a portion of price should be charged.
b. The costs of demolishing the old buildings should be capitalized.
c. The net book value of the old buildings for the company in (c) would be written off when they were razed since they didn’t purchase the building and their cost was its book value. Since book values of real property are typically less than market value, the “cost” of the new buildings would be less than the cost of buildings built by the Archer Company. The construction cost and demolition costs would remain the same in both situations.
3. Strengthening of foundation, outside engineer to assist in installation and sales tax on machine can be all capitalized as they are necessary to make the asset ready for its intended use. Although company would be inclined to report them as normal operating expenses for tax purposes.
c. Assuming the old machine was similar to the new machine, no gain will be recorded. The net book value of the old machine will be added to the cash to establish the cost of new machine. If the machines were not similar, the difference between the market value and book value will be recorded as gain on disposal of the old machine.
4. The customer is buying the computer along with the serv ...