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Acquisition of Plant assets by Gorman Corporation

During 2006 and 2007, Gorman Corporation experienced several transactions involving plant assets. A number of errors were made in recording some of these transactions. For each item listed below, indicate the effect of the error (if any) in the blanks provided by using the following codes:
O = Overstate; U = Understate; NE = No Effect
If no error was made, write NE in each of the four columns.

2006 2007
Net Book Net Book
Value of Value of
Plant 2006 Plant 2007
Assets at Net Assets at Net
Transaction 12/31/06 Income 12/31/07 Income

1. The cost of installing a new computer system in 2006 was not recorded in 2006. It was charged to expense in 2007.

2. In 2007 clerical workers were trained to use the new computer system at a cost of $15,000, which was erroneously capital-ized. The cost is to be written off over the expected life of the new computer system.

3. A major overhaul of machinery in 2006, which extended useful life by 5 years, was charged to accumulated depreciation in 2006.

4. Interest cost qualifying for capitalization in 2006 was charged to interest expense in 2006.

5. In 2006 land was bought for an employee parking lot. The $2,000 title search fee was charged to expense in 2006.

6. The cost of moving several manufacturing facilities from metropolitan locations to suburban areas in 2006 was capitalized. The cost was written off over a 10-year period beginning in 2006.

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Solution Preview

For your convenience, I have attached a formatted MS Excel spreadsheet containing the information below, along with notes which should prove helpful in gaining a better understanding of the material. Feel free to contact me in the future in the event that additional help is needed.

During 2006 and 2007, Gorman Corporation experienced several transactions involving plant assets.
A number of errors were made in recording some of these transactions. For each item listed below,
indicate the effect of the error (if any) in the blanks provided by using the following codes:

O = ...

Solution Summary

This posting contains a formatted MS Excel spreadsheet contains information on the acquisition of plant assets by Gorman Corporation, and the resultant effects to the company's financial information.

$2.19