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    Classification of items

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    Avatar Company was formed on January 1, 2007, and began constructing a new plant. At the end of 2007, its auditor discovered that all expenditures involving long-term assets had been debited to an account called Fixed Assets An analysis of the Fixed Assets account, which had a year-end balance of $2,644,972, disclosed that it contained the following items:

    Cost of land $ 316,600
    Surveying costs 4,100
    Transfer of title and other fees
    required by the county 920
    Broker's fees for land 21,144
    Attorney's fees associated with
    land acquisition 7,048
    Cost of removing timber from land 50,400
    Cost of grading land 4,200
    Cost of digging building foundation 34,600
    Architect's fee for building and
    land improvements
    (80 percent building) 64,800
    Cost of building construction 710,000
    Cost of sidewalks 11,400
    Cost of parking lots 54,400
    Cost of lighting for grounds 80,300
    Cost of landscaping 11,800
    Coast of machinery 989,000
    Shipping cost on machinery 55,300
    Cost of installing machinery 176,200
    Cost of testing machinery 22,100
    Cost of changes in building to comply
    with safety regulations pertaining to machinery 12,540
    Cost of repairing building that was damaged in
    the installation of machinery 8,900
    Cost of medical bill for injury received by employee
    while installing machinery 2,400
    Cost of water damage to building during heavy rains
    prior to opening the plant for operation 6,820
    Account balance $2,644,972

    Avatar Company sold the timber it cleared from the land to a firewood dealer for $5,000. This amount was credited to Miscellaneous Income.
    During the construction period, two of Avatar's supervisors devoted full time to the construction project. Their annual salaries were $48,000 and $42,000, respectively. They spent two months on the purchase and preparation of the land, six months on the construction of the building 9approximately one-sixth of which was devoted to improvements on the grounds), and one month on machinery installation. When the plant began operation on October 1, the supervisors returned to their regular duties. Their salaries were debited to Factory Salaries Expense.

    1. Prepare a schedule with the following column headings: Land, Land Improvements, Buildings, Machinery, and Expense. Place each of the above expenditures in the appropriate column. Negative amounts should be shown in parentheses. Total the columns.

    2. What impact does the classification of the items among several accounts have on evaluating the profitability performance of the company?

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    Solution Summary

    The solution explains the classification of items in terms of Land, Land Improvements, Buildings, Machinery and Expense.