Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 40
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Acquisition and Disposition of Property, Plant, and Equipment
10 – 41
DERIVATIONS — Computational (cont.)
No. Answer Derivation
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 42
DERIVATIONS — Computational (cont.)
No. Answer Derivation
DERIVATIONS — CPA Adapted
No. Answer Derivation
Acquisition and Disposition of Property, Plant, and Equipment
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BRIEF EXERCISES
BE. 10-131—Plant asset accounting.
During 2017 and 2018, Sawyer Corporation experienced several transactions involving plant
assets. A number of errors were made in recording some of these transactions. For each item
listed below, indicate the effect of the error (if any) in the blanks provided by using the following
codes:
O = Overstate; U = Understate; NE = No Effect
If no error was made, write NE in each of the four columns.
2017 2018
Net Book Net Book
Value of Value of
Plant 2017 Plant 2018
Assets at Net Assets at Net
Transaction 12/31/17 Income 12/31/18 Income
1. The cost of installing a new computer
system in 2017 was not recorded in 2017.
It was charged to expense in 2018.
2. In 2018 clerical workers were trained to
use the new computer system at a cost of
$15,000, which was erroneously capital–
ized. The cost is to be written off over the
expected life of the new computer system.
3. A major overhaul of factory machinery in
2017, which extended its useful life by 5
years, was charged to accumulated
depreciation in 2017.
4. Interest cost qualifying for capitalization in
2017 was charged to interest expense in
2017.
5. In 2017 land was bought for an employee
parking lot. The $2,000 title search fee
was charged to expense in 2017.
6. The cost of moving several manufacturing
facilities from metropolitan locations to
suburban areas in 2017 was capitalized.
The cost was written off over a 10-year
period beginning in 2017.
______ _______ _______ ______
______ _______ _______ ______
______ _______ _______ ______
______ _______ _______ ______
______ _______ _______ ______
______ _______ _______ ______
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 44
Solution 10-131
BE. 10-132—Weighted-Average Accumulated Expenditures.
On April 1, Paine Co. began construction of a small building. Payments of $300,000 were made
monthly for four months beginning on April 1. The building was completed and ready for
occupancy on August 1. For the purpose of determining the amount of interest cost to be
capitalized, calculate the weighted-average accumulated expenditures on the building by
completing the schedule below:
Date Expenditures Capitalization Period Weighted-Ave. Accum. Expend.
$250,000
BE. 10–133—Capitalization of interest.
On March 1, Mocl Co. began construction of a small building. The following expenditures were
incurred for construction:
March 1 $ 300,000 April 1 $ 296,000
May 1 720,000 June 1 1,080,000
July 1 400,000
The building was completed and occupied on July 1. To help pay for construction $200,000 was
borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during
the year was a $2,000,000, 10% note issued two years ago.
Instructions
(a) Calculate the weighted-average accumulated expenditures.
(b) Calculate avoidable interest.
Acquisition and Disposition of Property, Plant, and Equipment
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Solution 10-133
EXERCISES
Ex. 10-134—Nonmonetary exchange.
A machine cost $300,000, has annual depreciation expense of $60,000, and has accumulated
depreciation of $150,000 on December 31, 2017. On April 1, 2018, when the machine has a fair
value of $120,000, it is exchanged for a similar machine with a fair value of $360,000 and the
proper amount of cash is paid. The exchange lacked commercial substance.
Instructions
Prepare all entries that are necessary at April 1, 2018.
Test Bank for Intermediate Accounting, Sixteenth Edition
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Ex. 10-135—Nonmonetary exchange.
Equipment that cost $600,000 and has accumulated depreciation of $475,000 is exchanged for
equipment with a fair value of $240,000 and $60,000 cash is received. The exchange lacked
commercial substance.
Instructions
(a) Show the calculation of the gain to be recognized from the exchange.
(b) Prepare the entry for the exchange. Show a check of the amount recorded for the new
equipment.
Solution 10-135
Ex. 10-136—Donated assets.
Cheng Company has recently decided to accept a proposal from the City of Bel Aire that publicly
owned property with a large warehouse located on it will be donated to Cheng if Cheng will build
a branch plant in Bel Aire. The appraised value of the property is $500,000 and of the warehouse
is $1,000,000.
Instructions
Prepare the entry by Cheng for the receipt of the properties.
Acquisition and Disposition of Property, Plant, and Equipment
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Ex. 10-137—Capitalizing vs. Expensing.
Consider each of the items below. Place the proper letter in the blank space provided to indicate
the nature of the account or accounts to be debited when recording each transaction using the
preferred accounting treatment. Prepayments should be recorded in balance sheet accounts.
Disregard income tax considerations unless instructed otherwise.
a. asset(s) only
b. accumulated amortization, depletion, or depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts
____ 1. A motor in one of North Company’s trucks was overhauled at a cost of $600. It is
expected that this will extend the life of the truck for two years.
____ 2. Machinery which had originally cost $130,000 was rearranged at a cost of $450,
including installation, in order to improve production.
____ 3. Orlando Company recently purchased land and two buildings for a total cost of
$35,000, and entered the purchase on the books. The $1,200 cost of razing the
smaller building, which has an appraisal value of $6,200, is recorded.
____ 4. Jantzen Company traded its old machine with a net book value of $3,000 plus cash of
$7,000 for a new one which had a fair market value of $9,000.
____ 5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading
and setting up a new $6,000 precision machine in the plant. The wages earned in this
five-day period, $480, are recorded.
____ 6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a
cost of $13,000. As a result the insurance rate was decreased by 40%.
____ 7. An improvement, which extended the life but not the usefulness of the asset, cost
$6,000.
____ 8. The attic of the administration building was finished at a cost of $3,000 to provide an
additional office.
____ 9. In March, the Lyon Theatre bought projection equipment on the installment basis. The
contract price was $23,610, payable $5,610 down, and $2,250 a month for the next
eight months. The cash price for this equipment was $22,530.
____ 10. Lambert Company recorded the first year’s interest on 6% $100,000 ten-year bonds
sold a year ago at 94. The bonds were sold in order to finance the construction of a
hydroelectric plant. Six months after the sale of the bonds, the construction of the
hydroelectric plant was completed and operations were begun. (Only cash interest,
and not discount amortization, is to be considered.)
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 48
Solution 10-137
PROBLEMS
Pr. 10-138—Capitalizing acquisition costs.
Gibbs Manufacturing Co. was incorporated on 1/2/17 but was unable to begin manufacturing
activities until 8/1/17 because new factory facilities were not completed until that date. The Land
and Buildings account at 12/31/17 per the books was as follows:
Date Item Amount
1/31/17 Land and dilapidated building $200,000
2/28/17 Cost of removing building 4,000
4/1/17 Legal fees 6,000
5/1/17 Fire insurance premium payment 5,400
5/1/17 Special tax assessment for streets 4,500
5/1/17 Partial payment of new building construction 210,000
8/1/17 Final payment on building construction 210,000
8/1/17 General expenses 30,000
12/31/17 Asset write-up 75,000
$744,900
Additional information:
1. To acquire the land and building on 1/31/17, the company paid $100,000 cash and 1,000
shares of its common stock (par value = $100/share) which is very actively traded and had a
fair value per share of $180.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also
received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
$6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2017.
5. General expenses covered the following for the period 1/2/17 to 8/1/17.
President’s salary $20,000
Plant superintendent covering supervision of new building 10,000
$30,000
6. Because of the rising land costs, the president was sure that the land was worth at least
$75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/17 for a separate land account and a separate
buildings account. Use separate T-accounts (one for land and one for buildings) labeling all the
relevant amounts and disclosing all computations.
Acquisition and Disposition of Property, Plant, and Equipment
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Pr. 10-139—Capitalization of interest.
During 2017, Barden Building Company constructed various assets at a total cost of $14,700,000.
The weighted average accumulated expenditures on assets qualifying for capitalization of interest
during 2017 were $9,800,000. The company had the following debt outstanding at December 31,
2017:
1. 10%, 5-year note to finance construction of various assets,
dated January 1, 2017, with interest payable annually on January 1 $6,300,000
2. 12%, ten-year bonds issued at par on December 31, 2011, with interest
payable annually on December 31 7,000,000
3. 9%, 3-year note payable, dated January 1, 2016, with interest payable
annually on January 1 3,500,000
Instructions
Compute the amounts of each of the following (show computations).
1. Avoidable interest.
2. Total interest to be capitalized during 2017.
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 50
Solution 10-139
Pr. 10-140—Capitalization of interest.
Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete
modernization of Dobbs‘s manufacturing facility. Construction was begun on June 1, 2017 and
was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during
2017:
Date Payment
June 1, 2017 $2,000,000
August 31, 2017 3,000,000
December 31, 2017 2,500,000
In order to help finance the construction, Dobbs issued the following during 2017:
1. $1,700,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest
payable annually on May 31.
2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2017.
In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $425,000, 12%
note payable dated January 1, 2013 and due January 1, 2023, with interest payable annually on
January 1.
Instructions
Compute the amounts of each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
2. Avoidable interest incurred during 2017.
3. Total amount of interest cost to be capitalized during 2017.
Acquisition and Disposition of Property, Plant, and Equipment
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Solution 10-140
Pr. 10-141—Asset acquisition.
Ford Inc. plans to acquire an additional machine on January 1, 2017 to meet the growing demand
for its product. Stever Company offers to provide the machine to Ford using either of the options
listed below (each option gives Ford exactly the same machine and gives Stever Company
approximately the same net present value cash equivalent at 10%).
Option 1 — Cash purchase $3,200,000.
Option 2 — Installment purchase requiring 15 annual payments of $420,716 due
December 31 each year.
The expected economic life of this machine to Ford is 15 years. Salvage value at that time is
estimated to be $200,000. Straight-line depreciation is used. Interest expense under Option 2 is
computed using the effective interest method.
Instructions
Based upon current generally accepted accounting principles, state how, if at all, the book value
of the machine and the liability should appear on the December 31, 2017 balance sheet of Ford
Inc., for each option. Present your answer on an answer sheet in the following format. If an item
should not appear in the balance sheet, write “not shown” opposite the option.
Assets Liabilities
Account Name Amount Account Name Amount
Option 1
Option 2
Test Bank for Intermediate Accounting, Sixteenth Edition
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Pr. 10-142—Nonmonetary exchanges.
Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a
5% depreciation charge per year on buildings. The following transactions occurred in 2018:
March 31, 2018— Negotiations which began in 2017 were completed and a building purchased
1/1/09 (depreciation has been properly charged through December 31, 2017)
at a cost of $9,600,000 with a fair value of $6,000,000 was exchanged for a
second building which also had a fair value of $6,000,000. The exchange had
no commercial substance. Both parcels of land on which the buildings were
located were equal in value, and had a fair value equal to book value.
June 30, 2018— Machinery with a cost of $1,080,000 and accumulated depreciation through
January 1 of $810,000 was exchanged with $675,000 cash for a parcel of land
with a fair value of $1,040,000. The exchange had commercial substance.
Instructions
Prepare all appropriate journal entries for Moore Corporation for the above dates.
Acquisition and Disposition of Property, Plant, and Equipment
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Pr. 10-143—Nonmonetary exchange.
Rogers Co. had a sheet metal cutter that cost $240,000 on January 5, 2013. This old cutter had
an estimated life of ten years and a salvage value of $40,000. On April 3, 2018, the old cutter is
exchanged for a new cutter with a fair value of $120,000. The exchange lacked commercial
substance. Rogers also received $30,000 cash. Assume that the last fiscal period ended on
December 31, 2017, and that straight-line depreciation is used.
Instructions
(a) Show the calculation of the amount of the gain or loss to be recognized by Rogers Co.
(b) Prepare all entries that are necessary on April 3, 2018. Show a check of the amount
recorded for the new cutter.
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 54
Machinery ………………………………………………………. 240,000
Gain on Disposal of Machinery …………………………... 3,000
Check: Fair value $120,000
Less deferred gain (12,000)
Basis of new machinery $108,000
Pr. 10-144—Nonmonetary exchange.
Layne Co. has a machine that cost $850,000 on March 20, 2014. This old machine had an
estimated life of ten years and a salvage value of $50,000. On December 23, 2018, the old
machine is exchanged for a new machine with a fair value of $540,000. The exchange lacked
commercial substance. Layne also received $60,000 cash. Assume that the last fiscal period
ended on December 31, 2017, and that straight-line depreciation is used.
Instructions
(a) Show the calculation of the amount of gain or loss to be recognized by Layne Co. from the
exchange.
(b) Prepare all entries that are necessary on December 23, 2015. Show a check of the amount
recorded for the new machine.
Pr. 10-145—Nonmonetary exchange.
Hodge Co. exchanged Building 24 which has an appraised value of $6,400,000, a cost of
$10,120,000, and accumulated depreciation of $4,800,000 for Building M belonging to Fine Co.
Building M has an appraised value of $6,016,000, a cost of $12,040,000, and accumulated
depreciation of $6,336,000. The correct amount of cash was also paid. Assume depreciation has
already been updated.
Acquisition and Disposition of Property, Plant, and Equipment
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Instructions
Prepare the entries on both companies’ books assuming the exchange had no commercial
substance. Show a check of the amount recorded for Building M on Hodge’s books. (Round to
the nearest dollar.)
Pr. 10-146—Nonmonetary exchange.
Beeman Company exchanged machinery with an appraised value of $4,680,000, a recorded cost
of $7,200,000 and accumulated depreciation of $3,600,000 with Lacey Corporation for machinery
Lacey owns. The machinery has an appraised value of $4,520,000, a recorded cost of
$8,640,000, and accumulated depreciation of $4,752,000. Lacey also gave Beeman $160,000 in
the exchange. Assume depreciation has already been updated.
Test Bank for Intermediate Accounting, Sixteenth Edition
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Instructions
(a) Prepare the entries on both companies’ books assuming that the exchange had commercial
substance. (Round all computations to the nearest dollar.)
(b) Prepare the entries on both companies’ books assuming that the exchange lacked
commercial substance. (Round all computations to the nearest dollar.)
Acquisition and Disposition of Property, Plant, and Equipment
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Solution 10-146
Test Bank for Intermediate Accounting, Sixteenth Edition
10 – 58
Short Answer:
1. What are the major characteristics of plant assets?
1. The major characteristics of plant assets are that (1) they are acquired for use in
operations and not for resale, (2) they are long-term in nature and usually subject to
depreciation, and (3) they have physical substance.
2. What interest rates should be used in determining the amount of interest to be capitalized?
How should the amount of interest to be capitalized be determined?
2. The avoidable interest is determined by multiplying (an) interest rate(s) by the weighted–
average amount of accumulated expenditures on qualifying assets. For the portion of
weighted-average accumulated expenditures which is less than or equal to any amounts
borrowed specifically to finance construction of the assets, the capitalization rate is the
specific interest rate incurred. For the portion of weighted-average accumulated
expenditures which is greater than specific debt incurred, the interest rate is a weighted
average of all other interest rates incurred.
The amount of interest to be capitalized is the avoidable interest, or the actual interest
incurred, whichever is lower.