Adamski Corporation manufactures ballet shoes and is experiencing a period
Adamski Corporation manufactures ballet shoes and is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Tanya Mullinger, newly hired with the title Capital Asset Accountant, requested that Walter Kaster, Adamski's controller, review the following transactions:
Transaction 1
On June 1, 20I4, Adamski Corporation purchased equipment from Venghaus Corporation. Adamski issued a $20,000, four-year, non-interest-bearing note to Venghaus for the new equipment. Adamski will pay off the note in four equal instalments due at the end of each of the next four years. At the transaction date, the prevailing market interest rate for obligations of this nature was I 0%. Freight costs of $42 5 and installation costs of $500 were incurred in completing this transaction. The new equipment qualifies for a $2,000 government grant.
Transaction 2
On December 1, 20I4, Adamski purchased several assets of Haukap Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to $210,000 and included the assets in the following list. Adamski engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the assets' fair values, which are also provided.
During its fiscal year ended May 31, 2015, Adamski incurred $8,000 of interest expense in connection with the financing of these assets.
Transaction 3
On March I, 2015, Adamski traded in four units of specialized equipment and paid an additional $25,000 cash for a technologically up-to-date machine that should do the same job as the other machines, but much more efficiently and profitably. The equipment that was traded in had a combined carrying amount of $35,000, as Adamski had recorded $45,000 of accumulated depreciation against these assets. Adamski's controller and the sales manager of the supplier company agreed that the new equipment had a fair value of $64,000.
(a) Tangible capital assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
(b) For each of the three transactions described above, determine the value at which Adamski Corporation should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
(c) The books of Adan1ski Corporation show the following additional transactions for the fiscal year ended May 31, 2015:
1. Acquisition of a building for speculative purposes
2. Purchase of a two-year insurance policy covering plant equipment
3. Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes
For each of these transactions, indicate whether the asset should be classified as an item of property, plant, and equipment. If it should be, explain why. If it should not, explain why not, and identify the proper classification.
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