NW Tool Supply Company purchased land and a building on April 1, 2015, for $385,000. The company
Question:
NW Tool Supply Company purchased land and a building on April 1, 2015, for $385,000. The company paid $115,000 in cash and signed a 5% note payable for the balance. At that time, it was estimated that the land was worth $150,000 and the building, $235,000. The building was estimated to have a 25-year useful life with a $35,000 residual value. The company has a December 31 year end, prepares adjusting entries annually, and uses the straight-line method for buildings; depreciation is calculated to the nearest month. The following are related trans-
actions and adjustments during the next three years.
2015
Dec. 31 Recorded annual depreciation.
31 Paid the interest owing on the note payable.
2016
Feb. 17 Paid $225 to have the furnace cleaned and serviced.
Dec. 31 Recorded annual depreciation.
31 Paid the interest owing on the note payable.
31 The land and building were tested for impairment. The land had a recoverable amount of $120,000 and the building, $240,000.
2017
Jan. 31 Sold the land and building for $320,000 cash: $110,000 for the land and $210,000 for the building.
Feb. 1 Paid the note payable and interest owing
Instruction
(a) Record the above transactions and adjustments, including the acquisition on April 1, 2015. (Round depreciation calculation to the nearest dollar.)
(b) What factors may have been responsible for the impairment?
(c) Assume instead that the company sold the land and building on October 31, 2017, for $400,000 cash: $160,000 for the land and $240,000 for the building. Prepare the journal entries to record the sale.
Taking It Further
How might management determine the recoverable amount of the land and building at each year end? Would the company need to test the assets for impairment every year?
Step by Step Answer:
Accounting Principles
ISBN: 978-1119048503
7th Canadian Edition Volume 1
Authors: Jerry J. Weygandt, Donald E. Kieso, Paul D. Kimmel, Barbara Trenholm, Valerie Warren, Lori Novak