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EXERCISE 10.7 (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
€2,000,000
12%
€240,000
(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
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
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$3,000,000 X 12%
HK$360,000
(b)
Buildings ..........................................................................
131,000
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
EXERCISE 10.9 (Continued)
(b)
(1)
7/31
Cash ...............................................................
400,000
Notes Payable ................................
400,000
(2)
11/1
Cash ...............................................................
102,500
Interest Revenue
(3)
12/31
Machinery ......................................................
6,500
Interest Expense
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 ..................................................
15,000
(b)
Equipment (new) .............................................................
14,600*
Loss on Disposal of Equipment ................................
1,600**
(c)
Equipment (W16,200 X .91743) ................................
14,862
Notes Payable ........................................................
14,862
EXERCISE 10.12 (15–20 minutes)
(a)
Land .................................................................................
81,000
Deferred Grant Revenue ................................
81,000
(b)
Land .................................................................................
180,000
(c)
Machinery ................................................................
41,700
Materials ................................................................
12,500
Direct Labor ............................................................
16,000
EXERCISE 10.13 (20–25 minutes)
1.
Land .................................................................................
375,000
Buildings ................................................................
1,125,000
Equipment ................................................................
750,000
Share Capital—Ordinary
EXERCISE 10.13 (Continued)
2.
Buildings (€105,000 plus €161,000) ................................
266,000
Equipment ................................................................
135,000
Land Improvements ........................................................
122,000
EXERCISE 10.14 (15–20 minutes)
(a)
Equipment ................................................................
648,860*
Notes Payable ........................................................
648,860
Year
Note Payment
12% Interest
Reduction
of Principal
Balance
1/2/19
$648,860
EXERCISE 10.14 (Continued)
(c)
Interest Expense .............................................................
65,607
EXERCISE 10.15 (15–20 minutes)
(a)
Equipment ................................................................
105,815.80*
Cash ................................................................
30,000.00
(b)
Notes Payable ................................................................
12,418.42
Interest Expense (see schedule) ................................
7,581.58
Cash ................................................................
20,000.00
EXERCISE 10.15 (Continued)
(c)
Notes Payable ................................................................
13,660.26
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.
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.
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.
EXERCISE 10.16 (Continued)
Schedule of Weighted-Average Accumulated Expenditures
Date
Amount
Current Year
Capitalization
Period
Weighted-Average
Accumulated
Expenditures
February 1
€ 180,000
9/12
€135,000
Note that the capitalization period is only 9 months in this exercise.
Avoidable Interest
Land .................................................................................
180,000
Buildings ................................................................
1,114,600
Cash ................................................................
1,240,000
Interest Expense ....................................................
54,600
EXERCISE 10.17 (10–15 minutes)
Alatorre SpA
Machinery (€320 + €85) ...................................................
405
Mills Business Machine AG
Cash .................................................................................
320
Inventory ..........................................................................
85
EXERCISE 10.18 (20–25 minutes)
(a)
Exchange has commercial substance:
Depreciation Expense .....................................................
800
Accumulated Depreciation—Equipment ..............
800
*Cost of old asset
£12,700
Accumulated depreciation
(£7,200 + £800)
(8,000)
Book value
4,700
EXERCISE 10.18 (Continued)
(b)
Exchange lacks commercial substance:
Depreciation Expense .....................................................
800
Accumulated Depreciation—Equipment ..............
800
EXERCISE 10.19 (15–20 minutes)
(a) Exchange lacks commercial substance.
Santana SA:
EXERCISE 10.19 (Continued)
OR
Fair value received
R$15,500
Less: Gain deferred
4,500*
Delaware Company:
Cash .................................................................................
2,000
EXERCISE 10.19 (Continued)
(b)
Exchange has commercial substance
Santana SA
Equipment ................................................................
15,500*
Accumulated Depreciation—Equipment .......................
19,000
**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*
**Computation of loss on disposal of equipment:
Book value of old equipment
EXERCISE 10.20 (15–20 minutes)
(a)
Exchange has commercial substance
Equipment ................................................................
53,900
Valuation of equipment
Cash
HK$ 7,000
Computation of gain
Cost of old asset
HK$62,000
(b)
Fair value not determinable
Equipment ................................................................
50,100*
*Basis of new equipment
Book value of old equipment
HK$42,000
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
