Gray and Greene Small Private Manufacturing Company Gray & Greene Company is a relatively small private company with annual sales of $25,000,000, on a total asset base of $18,000,000.
The company manufactures specialized parts for larger corporations in the automobile, energy, and home products industries.
For instance, the company produces the control switch for automobile power seats, a fuel gauge monitor for gasoline pumps, and a thermostat switch for appliances such as refrigerators and air conditioners. The company employs about 80 people and generally runs two and sometimes three production shifts five days a week. A maintenance crew works on Saturdays to keep machines in working order.
Mike Gray the company CEO is a second-generation owner of the company. He took over as head of the company after his father retired in 19×5. Mike is a firm believer in specialty work. Since his company specializes and has expertise in certain types of products, Mike feels they should contract out to specialists for other areas of need. The company does not have a finance officer or personnel officer. Mike hired a personnel agency for all hiring and pension programs, and an accounting firm to maintain accounting records. Mike and Bob Greene, the COO, still have final authority and decision-making power over the major personnel and accounting related activities and have worked well in this relationship for a number of years. By leaving much of this administrative type work to specialized agencies, Mike and Bob have been able to concentrate their efforts into product development and production of their unique products.
Customers have been very pleased with the quality of the product produced by Gray & Greene as well as the reliability of delivery and performance. Their products have always been very cost competitive, and the company never lacks for business.
Mike has an administrative assistant, Gloria Wong, who oversees the accounting activities and works as an intermediary between the accounting service and Gray & Greene. Gloria keeps track of regular activities such as employee hours, and supply usage and sends required information and forms to the accounting service. The accounting service regularly transfers the information into various accounting reports. At the end of the year, the accounting service does a detailed analysis of the company operation and performance and develops the annual financial statements.
Kevin Butler, a newly hired MBA for Bean Counters Accounting Service, will be assisting on his first annual review of the Gray & Greene annual financial statements.
Specifically, he has been given the responsibility to reconstruct and develop the records for the company’s long-term assets.
During the year, Mike Gray had performed several activities related to Gray & Greene in the area of long-term assets. Recent technology had made some of the machines used in the manufacturing process obsolete. New machines were purchased. There was also some selling, disposing, and trading of older machines as products changed and new customers wanted new designs and processes. Mike had saved all the records related to fixed asset transactions and asked Gloria to relate this information to Kevin. Kevin was responsible for ensuring that these activities were properly reported for accounting purposes and incorporated into the financial statements for the 20×7 calendar year.
(1) Kevin and Gloria got together with the documentation and began to review the long-term asset activities. On January 15, 20×7, the company disposed of a stamping machine. The machine was originally purchased on January 15, 20×0 for $84,000. The machine was estimated to have a useful life of 10 years with a zero salvage value. (Note: Gray & Greene use a straight-line method of depreciation for all long-term assets unless otherwise noted.) No effort was made to sell or trade the machine because the machine was broken beyond repair. $100 was also paid to a salvage company to disassemble and remove the machine from the plant.
(2) The next activity occurred on February 1, 20×7. A molding machine was purchased for $247,000. The machine cost an additional $10,000 to have it shipped to the plant. Once on location, the company had $5,000 in installation and operating costs before the machine was ready to begin full operation. Two employees went to a one-day training school to learn how to operate the new machine at a cost of $1,400. The molding machine has an 8-year useful life and a salvage value of $22,000. The company paid cash for the shipping, installation, and training charges plus $25,000 for the machine. The balance due on the machine was set up with a note payable.
(3) On March 1, 20×7, a cutting machine was traded in for a similar new computerized cutting machine.
The old machine, which originally cost $130,000, had been at the company since January 1, 20×1 and had 1 year and 10 months of useful life remaining. The salvage value of the old machine was estimated at $10,000, but the company received $36,000 as a trade in value. The new machine cost $280,000, which included delivery and installation. The new machine has an expected life of 10 years at which time it could probably be sold for $40,000. The company made a down payment of $20,000 and signed a five-year note payable for the balance due.
(4) April 1, 20×7 a pressing machine was sold for $71,000. It originally cost $185,000 and had a book value on December 31, 20×6 of $72,500. The annual depreciation for this machine was $18,000. The machine was expected to have a $5,000 salvage value in about four years.
(5) To celebrate April 15, 20×7, the company acquired a new utility van, which would be used to pick up and deliver parts to customers and suppliers in the immediate vicinity. The van has a sticker price of $37,595, but the company was able to secure the vehicle for $35,000. The van will probably have a useful life of 5 years with a book value of $5,000 at the end of that time. The company paid $7,000 and signed a 3-year note for the balance due.
(6) On May 1, 20×7 an old pressing machine was traded in for a new computerized processing machine. These machines were used on different production lines and considered as dissimilar equipment. The old pressing machine cost $157,000 when it was purchased on May 1, 20×3 and had a useful life of 8 years with a salvage value of $13,000. A $90,000 trade-in allowance was given for the pressing machine. The new processing machine had a list price of $350,000 but only cost the company $260,000 after the trade-in. The new machine had a nine-year useful life with a $26,000 salvage value. The company paid $52,000 down and signed a note payable for the balance due.
(7) August 1, 20×7 the company had to complete a major overhaul on an assembly machine. The machine had been purchased for $430,000 on August 1, 20×2. The machine was expected to last for 12 years with a $70,000 salvage value. If the repairs had not been completed, the machine would not function efficiently in the company and would have to be disposed of for its parts, which would have brought the company about $30,000. The cost of the repairs was $33,000, but the overhaul was expected to add 2 years onto the remaining life of the machine. The repairs were paid for in cash.
(8) On September 1, 20×7 the company traded in a sorting machine which had cost $135,000 when purchased on March 1, 20×0 for a similar new sorting machine with a purchase price of $210,000.
The old machine had a ten-year useful life with a $15,000 salvage value. Gray & Greene received $52,000 as a trade-in value on the old machine. The new sorting machine is expected to have an eight-year life with an $11,000 salvage value. The company paid $40,000 in cash and signed a 3-year note for the balance due.
(9) A spray machine was purchased on October 1, 20×7. The cost of the machine was $165,000. The terms of the agreement were fob destination and the shipping costs were $3,000. The area of the building in which this machine was located had to be specially ventilated and partitioned to control fumes and dust. The cost of the building refurbishing was $35,000. The company used their own maintenance employees to complete the job as part of their regular work schedule, and their cost of the refurbishing was an additional $12,000. The machine had an eight-year life with a salvage value of $20,000. The company paid cash to have the building refurbished, signed a note for $125,000 and paid cash for the balance due on the machine.
(10) On November 1, 20×7 a molding machine needed a replacement part. The cost of the part was $8,400, which the company paid for in cash. The purchase price of the machine on November 1, 20×6 was $232,000 and it had an eight-year useful life with a $40,000 salvage value. This part was not expected to increase the useful life of the machine. This part typically breaks down after four years, so the fact that it only lasted one year was a concern. The company can expect to replace this part again in four years or less.
Gray and Greene Small Private Manufacturing Company Required
Complete all required journal entries for each of the long-term activities, which took place during 20×7. Remember to account for the appropriate depreciation expense for the year on any of the long-term assets. (The activities are numbered in bold to make it easier to follow.
