Case No. 1 Kang Company, a manufacturer of ballet shoes, isexperiencing a period of sustained growth. In an effort to expandits production capacity to meet increased demand for its product,the company recently made several acquisitions of plant andequipment. Rob Joffery, a newly hired fixed-asset accountant,requested Danny Nolte, Kangâs controller, review the followingtransactions. Transaction 1: On June 1, 2015, Kang Companypurchased equipment from Wynadot Corporation. Kang Issued aHK$28,000, 4-year, zero-interest-bearing note to Wynadot for thenew equipment. Kang will pay off the note in four equalinstallments due at the end of each of the next four years. At thedate of the transaction, the prevailing market rate of interest forobligations of this nature was 10%. Freight costs of HK$425 andinstallation costs of HK$500 were incurred in completing thistransaction. The appropriate factors for the time value of money ata 10% rate of interest are given below. Future value of HK$1 for 4periods: 1.46 Future value of an ordinary annuity for 4 periods:4.64 Present value of HK$1 for 4 periods: 0.68 Present value of anordinary annuity for 4 periods: 3.17 Transaction 2: On December 1,2015, Kang Company purchased several assets of Yakima Shoes Inc., asmall shoe manufacturer, whose owner was retiring. The purchaseamounted to HK$220,000 and included the assets listed below. Kangengaged the services of Tennyson Appraisal Inc., an independentappraiser, to determine the fair values of the assets which arepresented below. Yakima book value Fair value Inventory HK$ 60,000HK$ 50,000 Land 40,000 80,000 Buildings 70,000 120,000 HK$ 170,000HK$ 250,000 During its fiscal year ended May 31, 2016, Kangincurred HK$8,000 interest expense in connection with the financingof these assets. Transaction 3: On March 1, 2016, Kang Companyexchanged a number of used trucks plus cash for vacant landadjacent to its plant site. The exchange has commercial substance.Kang intends to use the land for parking lot. The trucks havecombined book value of HK$35,000, as Kang had recorded HK$20,000 ofaccumulated depreciation against those assets. Kangâs purchasingagent, who has had previous dealings in the second-hand market,indicated that the trucks had a fair value of HK$46,000 at the timeof the transaction. In addition to the trucks, Kang paid HK$19,000cash for the land. Instructions (a) Plant assets such as land,buildings, and equipment receive special accounting treatment.Describe the major characteristics of these assets. (b) For each ofthe three transactions described above, determine the value atwhich Kang Company should record the acquired assets. Support yourcalculations with an explanation of the underlying rationale. (c)The books of the Kang Company show the following additionaltransactions for the fiscal year ended May 31, 2016. 1. Acquisitionof a building for speculative purposes. 2. Purchase of a two-yearinsurance policy covering plant equipment. 3. Purchase of therights for the exclusive use of a process used in the manufactureof ballet shoes. For each of the transactions, indicate whether theasset should be classified as a plant asset. If it is a plantasset, explain why it is. If it is not a plant asset, explain whynot, and identify the proper classification.
Case No. 1 Kang Company, a manufacturer of ballet shoes, isexperiencing a period of sustained growth. In an effort to expandits production capacity to meet increased demand for its product,the company recently made several acquisitions of plant andequipment. Rob Joffery, a newly hired fixed-asset accountant,requested Danny Nolte, Kangâs controller, review the followingtransactions. Transaction 1: On June 1, 2015, Kang Companypurchased equipment from Wynadot Corporation. Kang Issued aHK$28,000, 4-year, zero-interest-bearing note to Wynadot for thenew equipment. Kang will pay off the note in four equalinstallments due at the end of each of the next four years. At thedate of the transaction, the prevailing market rate of interest forobligations of this nature was 10%. Freight costs of HK$425 andinstallation costs of HK$500 were incurred in completing thistransaction. The appropriate factors for the time value of money ata 10% rate of interest are given below. Future value of HK$1 for 4periods: 1.46 Future value of an ordinary annuity for 4 periods:4.64 Present value of HK$1 for 4 periods: 0.68 Present value of anordinary annuity for 4 periods: 3.17 Transaction 2: On December 1,2015, Kang Company purchased several assets of Yakima Shoes Inc., asmall shoe manufacturer, whose owner was retiring. The purchaseamounted to HK$220,000 and included the assets listed below. Kangengaged the services of Tennyson Appraisal Inc., an independentappraiser, to determine the fair values of the assets which arepresented below. Yakima book value Fair value Inventory HK$ 60,000HK$ 50,000 Land 40,000 80,000 Buildings 70,000 120,000 HK$ 170,000HK$ 250,000 During its fiscal year ended May 31, 2016, Kangincurred HK$8,000 interest expense in connection with the financingof these assets. Transaction 3: On March 1, 2016, Kang Companyexchanged a number of used trucks plus cash for vacant landadjacent to its plant site. The exchange has commercial substance.Kang intends to use the land for parking lot. The trucks havecombined book value of HK$35,000, as Kang had recorded HK$20,000 ofaccumulated depreciation against those assets. Kangâs purchasingagent, who has had previous dealings in the second-hand market,indicated that the trucks had a fair value of HK$46,000 at the timeof the transaction. In addition to the trucks, Kang paid HK$19,000cash for the land. Instructions (a) Plant assets such as land,buildings, and equipment receive special accounting treatment.Describe the major characteristics of these assets. (b) For each ofthe three transactions described above, determine the value atwhich Kang Company should record the acquired assets. Support yourcalculations with an explanation of the underlying rationale. (c)The books of the Kang Company show the following additionaltransactions for the fiscal year ended May 31, 2016. 1. Acquisitionof a building for speculative purposes. 2. Purchase of a two-yearinsurance policy covering plant equipment. 3. Purchase of therights for the exclusive use of a process used in the manufactureof ballet shoes. For each of the transactions, indicate whether theasset should be classified as a plant asset. If it is a plantasset, explain why it is. If it is not a plant asset, explain whynot, and identify the proper classification.
