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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Capital expenditures budget
On August 1, 20Y4. the controller of Handy Dan Tools Inc. is planning capital expenditures for the years 20Y5-20Y8. The controller interviewed several Handy Dan executives to collect the necessary information for the capital expenditures budget. Excerpts of the interviews are as follows:

Director of Facilities: A construction contract was signed in May 20Y4 for the construction of a new factory building at a contract cost of $9,000,000. The construction is scheduled to begin in 20Y5 and completed in 20Y6.
Vice President of Manufacturing: Once the new factor)' building is finished, we plan to purchase $3-6 million in equipment in late 20Y6. I expect that an additional $500,000 will lx-needed early in the following year (20Y7) to test and install the equipment before we can begin production. If sales continue to grow, I expect we'll need to invest another half million in equipment in 20Y8.
Vice President of Marketing: We have really been growing lately. I wouldn't be surprised if we need to expand the size of our new factory building in 20YS by at least 25%. Fortunately, we expect inflation to have minimal impact on construction costs over the next four years. Additionally, 1 would expect the cost of the expansion to Ik- proportional to the size of the expansion.
Director of Information Systems: We need to upgrade our information systems to wireless network technology. It doesn't make sense to do this until after the new factory building is completed and producing product. During 20Y7, once the factor)' is up and running, we should equip the whole facility with wireless technology. I think it would cost us $400,000 today to install the technology. However, prices have been dropping by 10% per year, so it should be less expensive at a later date.
President: I am excited about our long-term prospects. My only short-term concern is financing the $5,000,000 of construction costs on the portion of the new factor)' building scheduled to be completed in 20Y5.
Use the interview information above to prepare a capital expenditures budget for Handy Dan Tools Inc. for the years 20Y5-20Y8.

To determine

Concept Introduction:

Capital expenditure budget is the plan to invest in a fixed asset or in a long term plan. The period of capital expanditure is for more then a year.

To Prepare:

A capital expenditures budget for handy Dan Tools Inc. for the year 20Y520Y8.

Explanation

The controller of HD Tools Inc. is thinking to spend on capital expenditure for the year 20Y520Y8 and for that he collected the information.

The director has given some information related to construction of new factory building. The cost of construction would be $9,000,000 and that is capital expenditure. The construction will complete in the year 20Y6, so the cost will also be booked in the year 20Y6.

The vice president of manufacturing gives the information that the new equipments are purchased on

  20Y6 for $3.6million. The additional cost for installation will occur in year 20Y6 for $500,000. If sales increase president expects that they will purchase more equipments in 20Y8 and they also expect that they have to expand the factory building by 25% in the year 20Y8. Due to minimal inflation expansion cost will be equal to Proportion of expansion.

  Cost of expansion = $9,000,000×25%=$2,250,000

So, the cost of expansion is $5,250,000.

The director of company has also informed that the company will upgrade the information system by wireless network technology in the year 20Y7 and the up gradation cost is $400,000.

The construction of new building is financed with the amount of $5,000,000 by president

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