EXERCISE 10.21 (20–25 minutes)
(a) Any addition to plant assets is capitalized because a new asset has
been created. This addition increases the service potential of the
plant.
(d) Conceptually, the book value of the old electrical system should be
removed. However, practically it is often difficult if not impossible to
determine this amount. In this case, one of two approaches is
EXERCISE 10.22 (15–20 minutes)
1/30
Accumulated Depreciation—Buildings …………………….
112,200*
Loss on Disposal of Buildings …………………………..
Buildings ……………………………………………………….
132,000
Cash ……………………………………………………….
5,100
**($132,000 – $112,200) + $5,100
3/10
Cash ($2,900 – $300) …………………………..…………………..
2,600
Accumulated Depreciation—Machinery ……………………
11,200*
Loss on Disposal of Machinery …………………………..
Machinery ………………………………………………………
**($16,000 – $11,200) + $300 – $2,900
3/20
Machinery ……………………………………………………….
2,000
Cash ……………………………………………………….
2,000
5/18
Machinery ……………………………………………………….
5,500
Accumulated Depreciation—Machinery ……………………
2,100*
Loss on Disposal of Machinery …………………………..
1,400**
Machinery ………………………………………………………
3,500
Cash ……………………………………………………….
5,500
**($3,500 – $2,100)
6/23
Maintenance and Repairs Expense ………………………….
6,900
Cash ……………………………………………………….
6,900
EXERCISE 10.23 (20–25 minutes)
(a) C
(b) E (immaterial)
EXERCISE 10.24 (20–25 minutes)
(a)
Depreciation Expense (8/12 X $60,000) ……………………..
40,000
Accumulated Depreciation—Machinery …………….
40,000
Loss on Disposal of Machinery …………………………..
($1,300,000 – $400,000) – $430,000
Cash ………………………………………………………………………
Accumulated Depreciation—Machinery
($360,000 + $40,000) ……………………………………………..
Machine ……………………………………………………….
(b)
Depreciation Expense (3/12 X $60,000) ……………………..
15,000
Accumulated Depreciation—Machinery …………….
15,000
Accumulated Depreciation—Machinery
($360,000 + $15,000) ……………………………………………..
Machine ……………………………………………………….
Gain on Disposal of Machinery …………………………
*$1,040,000 – ($1,300,000 – $375,000)
EXERCISE 10.24 (Continued)
(c)
Depreciation Expense (7/12 X $60,000) …………………….
35,000
Accumulated Depreciation—Machinery ……………
35,000
Contribution Expense ……………………………………………..
Accumulated Depreciation—Machinery ……………………
($360,000 + $35,000)
Machine ……………………………………………………….
Gain on Disposal of Machinery ………………………..
*$1,100,000 – ($1,300,000 – $395,000)
EXERCISE 10.25 (15–20 minutes)
April 1
Cash ………………………………………………………………………
430,000
Accumulated Depreciation—Buildings ……………………..
160,000
Land ……………………………………………………….
60,000
Building ……………………………………………………….
280,000
Gain on Disposal of Plant Assets ……………………..
Book value of land $ 60,000
Aug. 1
Land ……………………………………………………………………….
90,000
Buildings ……………………………………………………….
400,000
Cash ……………………………………………………….
TIME AND PURPOSE OF PROBLEMS
Problem 10.1 (Time 35–40 minutes)
Purpose—to provide a problem involving the proper classification of costs related to property, plant,
Problem 10.2 (Time 40–55 minutes)
Purpose—to provide a problem involving the proper classification of costs related to property, plant,
Problem 10.3 (Time 35–45 minutes)
Purpose—to provide a problem involving the proper classification of costs related to land and buildings.
Problem 10.4 (Time 35–40 minutes)
Purpose—to provide a problem involving the method of handling the disposition of certain properties.
Problem 10.5 (Time 20–30 minutes)
Purpose—to provide the student with a problem in which schedules must be prepared on the costs of
Problem 10.6 (Time 25–35 minutes)
Purpose—to provide the student with a problem to determine costs to include in the value of land and
Problem 10.7 (Time 20–30 minutes)
Purpose—to provide the student with a problem to compute capitalized interest and to present disclo–
Problem 10.8 (Time 35–45 minutes)
Purpose—to provide the student with a problem involving the exchange of machinery. Four different
Problem 10.9 (Time 30–40 minutes)
Purpose—to provide a problem on the accounting treatment for exchanges of assets that have and do
Problem 10.10 (Time 30–40 minutes)
Problem 10.11 (Time 35–45 minutes)
and (3) a nonmonetary exchange.
SOLUTIONS TO PROBLEMS
PROBLEM 10.1
(a) REAGAN COMPANY
Analysis of Land Account
for 2020
Balance at January 1, 2020 ……………….
$ 230,000
Land site number 621
Acquisition cost ………………………………
$850,000
Commission to real estate agent ………
Clearing costs………………………………….
Less: Amounts recovered ……………….
22,000
Total land site number 621 ……..
Land site number 622
Land value ………………………………………
300,000
Building value ………………………………….
Demolition cost ……………………………….
41,000
Total land site number 622 ……..
461,000
REAGAN COMPANY
Analysis of Buildings Account
for 2020
Balance at January 1, 2020 ………………………
$ 890,000
Cost of new building constructed
on land site number 622
Construction costs ………………………….
Architectural design fees …………………
Building permit fee ………………………….
PROBLEM 10.1 (Continued)
REAGAN COMPANY
Analysis of Leasehold Improvements Account
for 2020
Balance at January 1, 2020 ………………………………………..
$660,000
REAGAN COMPANY
Analysis of Equipment Account
for 2020
Balance at January 1, 2020 ………………………………………..
$875,000
Cost of the new equipment acquired
Installation costs …………………………………………….
92,700
(b) Items in the fact situation which were not used to determine the
answer to (a) above are as follows:
1. Interest imputed on equity (stock) financing of $8,500 is not
PROBLEM 10.2
(a) LOBO CORPORATION
Analysis of Land Account
2020
Balance at January 1, 2020 ……………………………………..
$ 300,000
LOBO CORPORATION
Analysis of Land Improvements Account
2020
Balance at January 1, 2020 ……………………………………..
$ 140,000
LOBO CORPORATION
Analysis of Buildings Account
2020
Balance at January 1, 2020 ……………………………………..
$1,100,000
LOBO CORPORATION
Analysis of Equipment Account
2020
Balance at January 1, 2020 ……………………………………..
$ 960,000
Cost of new equipment acquired
Sales taxes …………………………………………………….
PROBLEM 10.2 (Continued)
Deduct cost of equipment disposed of
Equipment scrapped June 30, 2020 ………………….
Schedule 1
Computation of Fair Value of Plant Facility Acquired from
Mendota Company and Allocation to Land and Building
Land
($740,000 X .25)
20,000 shares of Lobo common stock at $37 quoted
(b) Items in the fact situation that were not used to determine the answer
to (a) above, are as follows:
1. The tract of land, which was acquired for $150,000 as a potential
PROBLEM 10.2 (Continued)
3. The $12,080 loss (Schedule 2) incurred on the scrapping of a
machine on June 30, 2020, should be included in the other ex–
penses and losses section in Lobo’s income statement. The $67,920
Schedule 2
Loss on Scrapping of Machine
June 30, 2020
Cost, January 1, 2012 …………………………………………………………..
$80,000
PROBLEM 10.2 (Continued)
Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2020
(Double-declining-balance rate is 20%)
Year
Book Value
at Beginning
of Year
Depreciation
Expense
Accumulated
Depreciation
2012
$80,000
$16,000
$16,000
2013
64,000
12,800
28,800
2016
32,768
6,554
53,786
2019
16,777
3,355
66,578
Schedule 4
Loss on Sale of Machine
July 1, 2020
Cost, January 1, 2017 ……………………………………………………….
$44,000
Less: Proceeds from sale …………………………………………………
PROBLEM 10.3
(a)
1.
Land (Schedule A) ……………………………………….
188,700
Buildings (Schedule B) ………………………………..
136,250
Insurance Expense (6 months X $95a) …………..
570
Organization Expense ………………………………….
610
Retained Earnings ……………………………………….
Salaries and Wages Expense ……………………….
Land and Buildings ……………………………..
Schedule A
Amount Consists of:
Acquisition Cost
($80,000 + [800 X $117]) ……………………..
Removal of Old Building ………………………
Legal Fees (Examination of title) …………..
Special Tax Assessment ………………………
4,000
Schedule B
Amount Consists of:
Legal Fees (Construction contract) ……….
$ 1,860
Construction Costs (First payment) ………
Construction Costs (Second payment) ….
Insurance (2 months)
Construction Costs (Final payment) ……..
30,000
2.
Land and Buildings (See Schedule C) ………………
4,000
Depreciation Expense ………………………….
PROBLEM 10.3 (Continued)
Schedule C
Depreciation taken …………………………..
$ 4,000
Depreciation that should be taken
PROBLEM 10.4
The following accounting treatment appears appropriate for these items:
Land—The loss on the condemnation of the land of $9,000 ($40,000 – $31,000)
should be reported as an unusual and for infrequent item on the income
statement. The $35,000 land purchase has no income statement effect.
Some contend that a portion of this gain should be deferred because the
proceeds are reinvested in similar assets. We do not believe such an
approach should be permitted. Deferral of the gain in this situation is not
permitted under GAAP.
Machine—The recognized gain on the transaction would be computed as
follows:
PROBLEM 10.4 (Continued)
This gain would probably be reported in other revenues and gains. It might
be reported as an unusual item if the company believes that such a situa–
tion occurs infrequently and if material. The cost of the new machine would
PROBLEM 10.5
(a) BLAIR CORPORATION
Cost of Land (Site #101)
As of September 30, 2021
Cost of land and old building ………………………………..
$500,000
Legal fees …………………………………………………………….
Title insurance ……………………………………………………..
Removal of old building ………………………………………..
54,000
(b) BLAIR CORPORATION
Cost of Building
As of September 30, 2021
Fixed construction contract price ………………………….
$3,000,000
Plans, specifications, and blueprints ……………………..
Interest capitalized during 2020 (Schedule 1) …………
Interest capitalized during 2021 (Schedule 2) …………
Cost of building ………………………………………………..
Schedule 1
Interest Capitalized During 2020 and 2021
Weighted-average
accumulated construction
expenditures
X
Interest rate
=
Interest to be
capitalized
2020:
$1,300,000
X
.10
=
$130,000*
2021:
$1,900,000
X
.10
=
PROBLEM 10.6
INTEREST CAPITALIZATION
Balance in the Land Account
Purchase Price …………………………..…………………………………
$139,000
Expenditures (2020)
Weighted—Average
Accumulated Expenditures
Date
Amount
Fraction
Interest Capitalized for 2020
Weighted—Average
Accumulated Expenditures
Interest
Rate
Amount
Capitalizable
PROBLEM 10.6 (Continued)
Expenditures (2021)
Fraction
Weighted
Expenditure
Date
Amount
1-Jan
$180,000
6/12
$ 90,000
1-Mar
4/12
80,000
Interest Capitalized for 2021
Weighted-
Average
Expenditure
x
Interest
Rate
=
Amount
Capitalizable
$225,600
x
.08
=
$18,048
(a) Balance in Land Account—2020 and 2021 …….. 147,000
PROBLEM 10.7
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
January 30, 2021
(b)
Weighted-Average
Accumulated Expenditures
X
Weighted-Average
Interest Rate
=
Avoidable
interest
$1,250,000
.112
$140,000
(c) (1) and (2)
Total actual interest cost
$560,000
PROBLEM 10.8
1.
Holyfield Corporation
Cash ………………………………………………………………
23,000
Machinery ($92,000 – $23,000) ………………………….
69,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
Machinery ……………………………………………….
Less: Fair value
Dorsett Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
45,000
Loss on Disposal of Machinery ………………………..
Cash ……………………………………………………….
Machinery ……………………………………………….
($120,000 – $45,000)
Less: Fair value
2.
Holyfield Corporation
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
8,000
Machinery ……………………………………………….
Winston Company
Machinery ($92,000 – $11,000) …………………………
81,000
Accumulated Depreciation—Machinery ……………
71,000
Machinery ……………………………………………….