EXERCISE 10.7 (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
€2,000,000
12%
€240,000
Capitalization rate computation
Interest
10% short-term loan
11% long-term loan
(b)
Actual Interest
Construction loan
€2,000,000 X 12% =
€240,000
Short-term loan
€1,600,000 X 10% =
160,000
Long-term loan
€1,000,000 X 11% =
110,000
interest.
Cost
€5,200,000
Interest capitalized
426,840
EXERCISE 10.8 (20–25 minutes)
(a)
Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
March 1
HK$ 360,000
10/12
HK$ 300,000
June 1
600,000
7/12
350,000
July 1
December 1
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
HK$1,500,000
12% (Construction loan)
HK$180,000
Computation of Actual Interest
Actual interest
HK$1,600,000 X 10%
HK$3,000,000 X 12%
HK$360,000
(b)
Buildings ………………………………………………………………..
131,000
Interest Expense* ……………………………………………………
829,000
HK$160,000) …………………………………………………
*Actual interest for year
Less: Amount capitalized (HK$180,000 – HK$49,000)
EXERCISE 10.9 (20–25 minutes)
(a)
Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
July 31
$300,000
3/12
$75,000
November 1
100,000
0
0
$75,000
Interest revenue
$100,000 X 10% X 3/12 = $2,500
Avoidable interest
Accumulated Expenditures
X
Avoidable Interest
$400,000 X 12% X 5/12 =
$30,000 X 8% =
2,400
Interest capitalized
$ 6,500 ($9,000 – $2,500)
EXERCISE 10.9 (Continued)
(b)
(1)
7/31
Cash ………………………………………………………
400,000
Notes Payable …………………………..
400,000
300,000
Investments (Trading) …………………………..
100,000
Cash …………………………..………………….
400,000
(2)
11/1
Cash ………………………………………………………
102,500
Interest Revenue
($100,000 X 10% X 3/12) ………………..
Machinery ………………………………………………
100,000
Cash …………………………..………………….
100,000
(3)
12/31
Machinery ………………………………………………
6,500
Interest Expense
($22,400 – $6,500) …………………………..
Cash ($30,000 X 8%) ……………………….
Interest Payable
EXERCISE 10.10 (20–25 minutes)
Situation I. R$40,000—The requirement is the amount Columbia should re–
port as capitalized interest at 12/31/2019. The amount of interest eligible for
capitalization is
EXERCISE 10.10 (Continued)
Situation II. R$39,000—The requirement is total interest costs to be capitalized.
IFRS identifies assets which qualify for interest capitalization: assets
Situation III. R$180,000—The requirement is to determine the amount of
interest to be capitalized on the financial statements at April 30, 2020. The
EXERCISE 10.11 (10–15 minutes)
(a)
Equipment ……………………………………………………….
15,000
Accounts Payable …………………………………………..
Accounts Payable …………………………………………………..
15,000
Equipment (W15,000 X .02) …………………………..
Cash …………………………..…………………………..
(b)
Equipment (new) …………………………………………………….
14,600*
Loss on Disposal of Equipment …………………………..
1,600**
Accounts Payable …………………………………………..
Equipment (old) ………………………………………………
**Cost
Accumulated depreciation
*Cost (W14,200 + W400)
Accounts Payable …………………………………………………..
Cash …………………………..…………………………..
(c)
Equipment (W16,200 X .91743) …………………………..
14,862
Notes Payable ………………………………………………..
Interest Expense …………………………………………………….
1,338
Notes Payable ……………………………………………………….
14,862
Cash …………………………..…………………………..
EXERCISE 10.12 (15–20 minutes)
(a)
Land ………………………………………………………………………
81,000
Deferred Grant Revenue …………………………..
81,000
(b)
Land ………………………………………………………………………
180,000
Buildings ……………………………………………………….
Share Capital—Ordinary ($50 X 14,000) ……………
Share Premium—Ordinary* …………………………..
(c)
Machinery ……………………………………………………….
41,700
Materials ……………………………………………………….
12,500
Direct Labor ……………………………………………………
16,000
Factory Overhead …………………………………………..
13,200*
*Fixed overhead applied (60% X $16,000)
Additional overhead
Factory supplies used
EXERCISE 10.13 (20–25 minutes)
1.
Land ………………………………………………………………………
375,000
Buildings ……………………………………………………….
1,125,000
Equipment ……………………………………………………….
750,000
Share Premium—Ordinary …………………………..
(€2,250,000 – €1,250,000)
Share Capital—Ordinary
EXERCISE 10.13 (Continued)
2.
Buildings (€105,000 plus €161,000) …………………………..
266,000
Equipment ……………………………………………………….
135,000
Land Improvements …………………………..……………………
122,000
Land ………………………………………………………………………
Cash …………………………..…………………………..
541,000
3.
Equipment ……………………………………………………….
284,900
Cash …………………………..…………………………..
284,900
of €280,000.)
EXERCISE 10.14 (15–20 minutes)
(a)
Equipment ……………………………………………………….
648,860*
Notes Payable ………………………………………………..
648,860
*PV of $180,000 annuity @ 12% for 5 years
($180,000 X 3.60478) = $648,860
(b)
Notes Payable ……………………………………………………….
102,137
Cash …………………………..…………………………..
180,000
*(12% X $648,860)
Year
Note Payment
12% Interest
Reduction
of Principal
1/2/19
12/31/19
EXERCISE 10.14 (Continued)
(c)
Interest Expense …………………………………………………….
65,607
Notes Payable ……………………………………………………….
Cash ……………………………………………………….
(d)
Depreciation Expense ……………………………………………..
Accumulated Depreciation—Equipment …………..
*($648,860 ÷ 10)
EXERCISE 10.15 (15–20 minutes)
(a)
Equipment ……………………………………………………….
105,815.80*
Cash ……………………………………………………….
30,000.00
Notes Payable ………………………………………………..
75,815.80
*PV of £20,000 annuity @ 10% for
5 years (£20,000 X 3.79079)
Down payment
(b)
Notes Payable ……………………………………………………….
12,418.42
Interest Expense (see schedule) …………………………..
7,581.58
Cash ……………………………………………………….
20,000.00
£20,000.00
£12,418.42
EXERCISE 10.15 (Continued)
(c)
Notes Payable ……………………………………………………….
13,660.26
Interest Expense …………………………………………………….
Cash …………………………..…………………………..
EXERCISE 10.16 (25–35 minutes)
LOGAN INDUSTRIES
Acquisition of Assets 1 and 2
Use appraised values to break-out the lump-sum purchase.
Description
Appraisal
Percentage
Lump-Sum
Value on
Books
Acquisition of Asset 3
Use the cash price as a basis for recording the asset with a discount recorded
on the note.
Machinery ……………………………………………………….
Cash …………………………..…………………………..
Notes Payable ………………………………………………..
EXERCISE 10.16 (Continued)
Acquisition of Asset 4
Since the exchange lacks commercial substance, the gain of €16,000 is not
recognized. Instead the gain of €16,000 (€80,000 – €64,000) is used to reduce
the basis of the asset acquired.
Machinery (€70,000 – €16,000) …………………………..
Accumulated Depreciation—Machinery ……………………
Cash ………………………………………………………………………
Machinery ………………………………………………………
Acquisition of Asset 5
In this case the Equipment should be placed on Logan’s books at the
market value of the shares. The difference between the shares’s par value
and their fair value (based on market price) should be credited to Share
Premium.
Equipment (100 X €11 per share) …………………………..
Share Capital—Ordinary…………………………..
Share Premium—Ordinary …………………………..
EXERCISE 10.16 (Continued)
Schedule of Weighted-Average Accumulated Expenditures
Date
Current Year
Capitalization
Period
Weighted-Average
Accumulated
Expenditures
February 1
9/12
€135,000
February 1
9/12
June 1
5/12
September 1
2/12
November 1
0/12
Note that the capitalization period is only 9 months in this exercise.
Avoidable Interest
X
=
Land ………………………………………………………………………
180,000
Buildings ……………………………………………………….
1,114,600
Cash …………………………..…………………………..
Interest Expense …………………………………………….
EXERCISE 10.17 (10–15 minutes)
Alatorre SpA
Machinery (€320 + €85) ……………………………………………
405
Accumulated Depreciation—Machinery ……………………
140
Loss on Disposal of Machinery …………………………..
Machinery ………………………………………………………
Cash ……………………………………………………….
*Computation of loss:
Book value of old machine (€290 – €140)
Fair value of old machine
Mills Business Machine AG
Cash ………………………………………………………………………
320
Inventory …………………………..……………………………………
85
Cost of Goods Sold …………………………………………………
270
Inventory …………………………..…………………………..
EXERCISE 10.18 (20–25 minutes)
(a)
Exchange has commercial substance:
Depreciation Expense ……………………………………………..
800
Accumulated Depreciation—Equipment …………..
(£12,700 – £700 = £12,000;
£12,000 ÷ 5 = £2,400;
£2,400 X 4/12 = £800)
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment …………………………..…………………………
Cash …………………………..…………………………..
*Cost of old asset
£12,700
Accumulated depreciation
(£7,200 + £800)
(8,000)
Book value
4,700
Fair value of old asset
Gain (on disposal of plant asset)
£ 500
**Cash paid
£10,000
Fair value of old melter
5,200
EXERCISE 10.18 (Continued)
(b)
Exchange lacks commercial substance:
Depreciation Expense ……………………………………………..
800
Accumulated Depreciation—Equipment …………..
800
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………..
Equipment ……………………………………………………..
Cash ……………………………………………………….
**Cash paid
Fair value of old asset
EXERCISE 10.19 (15–20 minutes)
(a) Exchange lacks commercial substance.
Santana SA:
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………..
Equipment………………………………………………………
Cash ……………………………………………………….
Valuation of equipment
Book value of equipment given
New equipment
EXERCISE 10.19 (Continued)
OR
Fair value received
R$15,500
Less: Gain deferred
4,500*
*Fair value of old equipment
Book value of old equipment
(9,000)
Delaware Company:
Cash ………………………………………………………………………
2,000
Equipment (R$13,500 + R$2,500*) …………………………..
Accumulated Depreciation—Equipment ……………………
Equipment ………………………………………………………
*Computation of loss:
Book value of old equipment
Fair value of old equipment
EXERCISE 10.19 (Continued)
(b)
Exchange has commercial substance
Santana SA
Equipment ……………………………………………………….
15,500*
Accumulated Depreciation—Equipment …………………..
19,000
Equipment ……………………………………………………..
Cash ……………………………………………………….
Gain on Disposal of Equipment ……………………….
*Cost of new equipment:
Cash paid
R$ 2,000
Fair value of old equipment
Cost of new equipment
R$15,500
**Computation of gain on disposal of equipment:
Fair value of old equipment
R$13,500
Book value of old equipment
(R$28,000 – R$19,000)
(9,000)
Gain on disposal of equipment
R$ 4,500
Delaware Company
Cash ………………………………………………………………………
2,000
Equipment ……………………………………………………….
13,500*
Accumulated Depreciation—Equipment (Old) ……………..
10,000
Loss on Disposal of Equipment …………………………..
Equipment ……………………………………………………..
*Cost of new equipment:
Fair value of equipment
R$15,500
Less: Cash received
Cost of new equipment
R$13,500
**Computation of loss on disposal of equipment:
Fair value of equipment (Old)
Book value of old equipment
EXERCISE 10.20 (15–20 minutes)
(a)
Exchange has commercial substance
Equipment ……………………………………………………….
53,900
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment …………………………..…………………………
Cash (HK$7,000 + HK$1,100) …………………………..
Valuation of equipment
Cash
HK$ 7,000
Installation cost
Market value of used equipment
Computation of gain
Cost of old asset
HK$62,000
Accumulated depreciation
Book value
Gain on disposal of equipment
(b)
Fair value not determinable
Equipment ……………………………………………………….
50,100*
Accumulated Depreciation—Equipment …………………..
Equipment …………………………..…………………………
Cash …………………………..…………………………..
*Basis of new equipment
Book value of old equipment
HK$42,000
Cash paid (including installation costs)
EXERCISE 10.21 (15–20 minutes)
(a) 1. Carrying amount = £320,000 (£400,000 – £80,000)
(b) 1. Deferred grant revenue balance = £80,000 (£100,000 – £20,000)
EXERCISE 10.22 (10–15 minutes)
(a) January 2, 2019
Cash (€5,000,000 X .74726) ……………………. 3,736,300
Note Payable …………………………………. 3,736,300
EXERCISE 10.23 (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.
diture increases the future service potential of the asset.
(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 followed.
One approach is to capitalize the replacement on the theory that suffi–
of the plant facility.
(e) See discussion in (d) above. In this case, because the useful life of
the asset has increased, a debit to Accumulated Depreciation would