On June 28, 2017, in relocating to a new town, Kerr Corp. purchased a property consisting of
Question:
Kerr Corp. then entered into a $1.3-million fixed-price contract with Maliseet Builders Inc. on August 1, 2017, for the construction of an office building on this site. The building was completed and occupied on April 29, 2018, as was a separate maintenance building that was constructed by Kerr's employees. Additional costs related to the property included:
As an incentive for Kerr to locate and build in the town, the municipality agreed not to charge its normal building permit fees of approximately $36,000. This amount was included in the $1.3-million contract fee. The building and the maintenance building are estimated to have a 40-year life from their dates of completion and will be depreciated using the straight-line method with no residual value.
Kerr is a private company with an April 30 year end, and the company accountant is currently analyzing the new Buildings account that was set up to capture all the expenditures and credits explained above that relate to the property.
Instructions
(a) Prepare a schedule that identifies the costs that would be capitalized and included in the new Buildings account on the April 30, 2018 statement of financial position, assuming the accountant wants to comply with ASPE but tends to be very conservative in nature; in other words, she does not want to overstate income or assets. Briefly justify your calculations. How would your answer change if Kerr were to comply with IFRS?
(b) Prepare a schedule that identifies the costs that would be capitalized and included in the new Buildings account on the April 30, 2018 statement of financial position, assuming the accountant wants to comply with ASPE, but is aware that Kerr needs to report increased income to support a requested increase in its bank loan next month. Briefly justify your calculations.
(c) Comment on the difference in results for (a) and (b) above. Calculate the total expenses related to the building under both scenarios. What else should be considered in determining the amount to be capitalized?
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Intermediate Accounting
ISBN: 978-1119048534
11th Canadian edition Volume 1
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy