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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Self-Construction Harshman Company constructed a building for its own use. The company incurred costs of $40,000 for materials and supplies, $68,000 for direct labor, and $7,000 for a supervisor’s overtime that was caused by the construction. Harshman uses a factory overhead rate of 50% of direct labor cost. Before construction, the company had received a bid of $162,000 from an outside contractor.

Required:

  1. 1. Assuming common practice is followed, at what value should Harshman capitalize the building?
  2. 2. Next Level What is the justification for determining the value described in Requirement 1?
  3. 3. Next Level Would your answer change if the bid from the outside contractor had been $135,000?

1.

To determine

State the value at which the Company H must capitalize the building.

Explanation

Cost of self-constructed assets:

Company sometimes constructs an item of “property, plant and equipment” which is used in the business operations and these are known as self-constructed assets. The cost of self-constructed assets comprises of expenses that are required to build an asset and put it in operating condition.

Cost of the constructed asset is calculated by allocating both variable overhead and a pro rata share of fixed overhead...

2.

To determine

Give justification for ascertaining the value described in requirement 1.

3.

To determine

Explain the manner in which the answer will change if the bid from the outside contractor is $135,000.

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