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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 Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the 5-month period from August 1, 2019, through December 31, 2019, Olson manufactured a milling machine for its own use. This machine was built as part of the regular production activities. The project required a large amount of time front planning and supervisory personnel, as well as that of some of the company’s officers, because it was a more sophisticated type of machine than the regular production models.

  Throughout the 5-month period, Olson charged all costs directly associated with the construction of the machine to a special account entitled “Asset Construction Account.” An analysis of the charges to this account as of December 31, 2019, follows:

Chapter 10, Problem 7P, Self-Construction Olson Machine Company manufactures small and large milling machines. Selling , example  1

Olson allocates factory overhead to normal production as a percent of direct labor dollars as follows:

Chapter 10, Problem 7P, Self-Construction Olson Machine Company manufactures small and large milling machines. Selling , example  2

Olson uses a flat rate of 40% of direct labor dollars to allocate general and administrative overhead.

  During the machine testing period, a cutter head malfunctioned and did extensive damage to the machine table and one cutter housing. This damage was not anticipated and was the result of an error in the assembly operation. Although no additional raw materials were needed to make the machine operational after the accident, the following labor for rework was required:

Chapter 10, Problem 7P, Self-Construction Olson Machine Company manufactures small and large milling machines. Selling , example  3

Olson has included all these labor charges in the asset construction account. In addition, it included in the account the repairs and maintenance charges of $1,340 that it incurred as a result of the malfunction.

Required:

  1. 1. Compute, consistent with GAAP and common practice, the amount that Olson should capitalize for the milling machine as of December 31, 2019, when it declares the machine operational.
  2. 2. Next Level Identify the costs you included in Requirement 1 for which there are acceptable alternative procedures. Describe the alternative procedure(s) in each case.

1.

To determine

Calculate the amount that Company O must capitalize for the milling machine as of December 31, 2019.

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.

ParticularsAmount ($)Amount ($)
Raw materials:  
Iron castings61,040  
Other raw materials.50,200$111,240
Direct labor:  
Layout (1)$450  
Electricians  (2)2,700 
Machinery (3)7,200 
Heat treatment (4)750 
Assembly  (5)2,450 
Testing (6)1,280 
Additional testing labor (7)80015,630
Factory overhead:  
Layout and electricians (8)$2,205  
Machining, heat treatment, assembly, testing (9)  
 12,48014,685
Interest paid 4,260
Total amount to be capitalized  145,815

Table (1)

Working notes:

(1)Calculate the amount of direct labor costs for layout:

Directlaborcostsforlayout=Numberofhours×Costperunit=90hours×$5=$450

(2)Calculate the amount of direct labor costs for electricians:

Directlaborcostsforelectricians}=[(NumberofhoursNumberofdirectlaborhours)×Costperunit]=[(380hours80hours)×$9]=$2,700

(3)Calculate the amount of direct labor costs for machinery:

DirectlaborcostsforMachinery}=[(NumberofhoursNumberofdirectlaborhours)×Costperunit]=[(1,100hours200hours)×$8]=$7,200

(4)Calculate the amount of direct labor costs for Heat treatment:

DirectlaborcostsforHeattreatment}=Numberofhours×Costperunit=100hours×$7.50=$750

(5)Calculate the amount of direct labor costs for assembly:

2.

To determine

Ascertain the costs included in requirement 1 for which there are acceptable alternative procedures and explain the alternative procedures for each case.

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