Riders Corporation manufactures bicycles. To meet the increased demand for its bicycles recently it acquired land and equipment and entered into a contract with a construction company to construct
Scenario
Riders Corporation manufactures bicycles. To meet the increased demand for its bicycles recently it acquired land and equipment and entered into a contract with a construction company to construct a new factory. Below are the details of expenses Riders incurred in 2016 in acquiring land and equipment and with regard to construction of factory.
| Purchase price of the land | $ 850,000 |
| Demolition and removal of old building | 35,000 |
| Clearing and grading the land before construction | 110,000 |
| Various closing costs in connection with acquiring the land | 10,000 |
| Architect’s fee | 12,500 |
| Payments to contractor for building construction | 1,850,000 |
| Equipment purchased | 575,000 |
| Freight charges on equipment | 24,000 |
| Trees, plants and other landscaping | 30,000 |
| Installation of a sprinkler system for the landscaping | 4,000 |
| Cost to build special platforms and install wiring for the equipment | 9,000 |
| Cost of trial runs to ensure proper installation of the Equipment | 5,000 |
| Fire and theft insurance on the factory for the first year of use | 18,000 |
Construction of building started on March 2016 and completed on December 2017. Riders Corporation had only one interest bearing long-term debt with a book value of $7,500,000 and an effective interest rate of 6%. Payment of $1,850,000 to contractor is made in several installments as shown below.
| March 1, 2016 | $400,000 |
| July 31,2016 | 450,000 |
| September 30, 2016 | 350,000 |
| November 30, 2016 | 450,000 |
| December 31, 2016 | 200,000 |
Requirements
- Explain the accounting treatment for each item of expenditure listed above.
- Determine the initial valuation of each of the assets Riders Corporation acquired in the above transactions.
Grading Rubric
| Requirement | Possible points |
|
Correct accounting treatment of all 13 items of
expenditure (2X13) | 26 |
| Correct determination of initial value of Land Correct determination of initial value of Building Correct determination of initial value of Equipment Correct determination of initial value of Land Improvements | 15 20 15 9 |
| Total | 85 |
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