EXERCISE 10.6 (Continued)
2.
Equipment ……………………………………………………….
25,000
Cash ……………………………………………………….
2,000
Note Payable ………………………………………………….
23,000
3.
Equipment ……………………………………………………….
19,600
Accounts Payable ($20,000 X .98) …………………….
19,600
4.
Land ……………………………………………………………………..
27,000
Contribution Revenue …………………………..
27,000
5.
Buildings ……………………………………………………….
Cash ……………………………………………………….
EXERCISE 10.7 (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
=
Avoidable Interest
$2,000,000
$240,000
10% short-term loan
11% long-term loan
EXERCISE 10.7 (Continued)
(b)
Actual Interest
Construction loan
$2,000,000 X .12 =
$240,000
Short-term loan
$1,400,000 X .10 =
140,000
Long-term loan
$1,000,000 X .11 =
avoidable interest.
Cost
$5,200,000
Interest capitalized
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
$ 360,000
10/12
$ 300,000
June 1
Accumulated Expenditures
X
.12 (Construction loan)
EXERCISE 10.8 (Continued)
Computation of Actual Interest
Actual interest
$3,000,000 X .12
$ 360,000
$4,000,000 X .13
$1,600,000 X .10
(b)
Buildings ……………………………………………………….
183,000
Interest Expense* ……………………………………………………
857,000
Cash ($360,000 + $520,000 + $160,000) …………….
*Actual interest for year
Less: Amount capitalized
EXERCISE 10.9 (20–25 minutes)
(a)
Computation of Weighted-Average Accumulated Expenditures
Expenditures
Capitalization
Weighted-Average
EXERCISE 10.9 (Continued)
Avoidable interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
Interest capitalized
$ 6,000**
(b)
(1)
7/31
Cash ……………………………………………………..
300,000
Note Payable …………………………..
300,000
Machinery ………………………………………………
200,000
Trading Securities …………………………..
100,000
Cash ………………………………………………
300,000
(2)
11/1
Machinery ………………………………………………
100,000
Cash ………………………………………………
100,000
(3)
Machinery ………………………………………………
Interest Expense
($17,400*** – $6,000**) …………………………..
Cash ($30,000 X .08) ……………………….
Interest Payable
($300,000 X .12 X 5/12) ………………….
EXERCISE 10.10 (20–25 minutes)
Situation I. $80,000—The requirement is the amount Apolo Ohno should
report as capitalized interest at 12/31/20. The amount of interest eligible for
capitalization is
Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest
Since Apolo Ohno has outstanding debt incurred specifically for the
Finally, per FASB ASC 835-20–30-1 the interest earned of $250,000 is
irrelevant to the question addressed in this problem because such interest
earned on the unexpended portion of the loan is not to be offset against the
EXERCISE 10.10 (Continued)
Situation III. $385,000—The requirement is to determine the amount of
interest to be capitalized on the financial statements at April 30, 2021. The
GAAP requirements are met: (1) expenditures for the asset have been
made, (2) activities that are necessary to get the asset ready for its
intended use are in progress, and (3) interest cost is being incurred. The
EXERCISE 10.11 (10–15 minutes)
(a)
Equipment ……………………………………………………….
10,000
Accounts Payable …………………………………………..
10,000
Accounts Payable …………………………………………………..
10,000
Equipment ($10,000 X .02) …………………………..
Cash ……………………………………………………….
9,800
(b)
Equipment (new) …………………………………………………….
9,900*
Loss on Disposal of Equipment …………………………..
1,600**
Accumulated Depreciation—Equipment …………………..
6,000
Accounts Payable …………………………………………..
9,500
Equipment (old) ……………………………………………..
8,000
*Cost ($9,500 + $400)
$9,900
**Cost
$8,000
Less: Accumulated depreciation***
Less: Fair value of equipment (old)
Accounts Payable …………………………………………………..
9,500
Cash ……………………………………………………….
9,500
(c)
Equipment ($10,800 X .91743 PV of 1@ 9% for
1 year) ……………………………………………………………………
9,908
Discount on Note Payable ($10,800 – $9,908) ……………
892
Note Payable ………………………………………………….
Interest Expense …………………………………………………….
892
Note Payable ……………………………………………………….
Discount on Note Payable …………………………..
Cash ……………………………………………………….
EXERCISE 10.12 (15–20 minutes)
(a)
Land ………………………………………………………………………
81,000
Contribution Revenue …………………………..
81,000
(b)
Land* ……………………………………………………………………..
180,000
Buildings* ……………………………………………………….
630,000
Common Stock ($50 X 13,000) …………………………
(c)
Machinery ……………………………………………………….
40,100**
Materials ……………………………………………………….
12,500
Direct Labor ……………………………………………………
15,000
Factory Overhead……………………………………………
*Fixed overhead applied (.60 X $15,000)
Additional overhead
Factory supplies used
EXERCISE 10.13 (20–25 minutes)
1.
Land ……………………………………………………………………..
350,000
Building …………………………..…………………………..
1,050,000
Equipment ……………………………………………………….
700,000
Common Stock (12,500 X $100) ……………………….
($2,100,000 – $1,250,000) …………………………..
The cost of the property, plant and equipment is $2,100,000 ($12,500 X
$168). This cost is allocated based on appraisal values as follows:
2.
Buildings ($105,000 plus $161,000) ………………………….
266,000
Equipment ……………………………………………………….
135,000
Land Improvements ………………………………………………..
122,000
Land ……………………………………………………………………..
Cash ……………………………………………………….
3.
Equipment ……………………………………………………….
265,300
Cash ……………………………………………………….
(1.00 – .02) of $260,000.)
EXERCISE 10.14 (15–20 minutes)
(a)
Equipment ……………………………………………………….
576,765*
Discount on Notes Payable …………………………..
Notes Payable ………………………………………………..
**($800,000 – $576,765)
(b)
Interest Expense …………………………………………………….
69,212
Notes Payable ……………………………………………………….
Discount on Notes Payable …………………………..
Cash ……………………………………………………….
Year
Note Payment
12% Interest
Reduction
of Principal
Balance
1/2/20
$576,765*
(c)
Interest Expense …………………………………………………….
58,317
Cash ……………………………………………………….
Accumulated Depreciation—Equipment …………..
($576,765* ÷ 10)
EXERCISE 10.15 (15–20 minutes)
(a)
Equipment ……………………………………………………….
86,861.85*
Discount on Notes Payable ……………………………………..
18,138.15**
Cash ……………………………………………………….
30,000.00
Notes Payable ($105,000 – $30,000) ………………………
75,000.00
($15,000 X 3.79079)
$56,861.85
Down payment
(b)
Notes Payable ……………………………………………………….
15,000.00
Interest Expense (see schedule) …………………………..
Cash ……………………………………………………….
Discount on Notes Payable …………………………..
Year
Note Payment
10% Interest
Reduction
of Principal
Balance
12/31/19
$56,861.85
12/31/20
(c)
Notes Payable ……………………………………………………….
15,000.00
EXERCISE 10.16 (25–35 minutes)
Hayes 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
Machinery
$ 90,000
90/120
100,000
75,000
Equipment
30/120
25,000
Machinery ……………………………………………………….
Equipment ……………………………………………………….
Cash …………………………..…………………………..
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 Asset 4
Since the exchange lacks commercial substance, a gain will be recognized
in the proportion of cash received ($10,000f/$80,000e) times the $20,000d
gain (FMV of $80,000 minus BV of $60,000). The gain recognized will then
Acquisition of Asset 5
In this case the equipment should be placed on Hayes’s books at the fair
market value of the stock. The difference between the stock’s par value and
its fair market value should be credited to Paid-in Capital in Excess of
Par—Common Stock.
EXERCISE 10.16 (Continued)
Construction of Building
Schedule of Weighted-Average Accumulated Expenditures
Date
Amount
Current Year
Capitalization
Period
Weighted-Average
Accumulated
Expenditures
February 1
$ 150,000
9/12
$112,500
February 1
120,000
9/12
90,000
June 1
360,000
5/12
September 1
480,000
2/12
80,000
November 1
100,000
0/12
0
Note that the capitalization is only 9 months in this problem.
Avoidable Interest
Weighted-Average
Accumulated Expenditures
Interest Rate
Avoidable Interest
$432,500
X
.12
=
$51,900a
Land ………………………………………………………………………
Cash ……………………………………………………….
Interest Expense …………………………………………….
EXERCISE 10.17 (10–15 minutes)
Busytown Corporation
Machinery ($340 + $85) ……………………………………………
425
Accumulated Depreciation – Machinery ……………………
140
Loss on Disposal of Machinery …………………………..
Machinery …………………………..………………………….
Cash ……………………………………………………….
*Computation of loss:
Dick Tracy Business Machine Company
Cash ………………………………………………………………………
340
Inventory ………………………………………………………………..
Cost of Goods Sold …………………………………………………
270
Inventory ……………………………………………………….
EXERCISE 10.18 (20–25 minutes)
(a)
Exchange has commercial substance:
Depreciation Expense ……………………………………………..
700
Accumulated Depreciation—Equipment …………..
700
($11,200 – $700 = $10,500;
$10,500 ÷ 5 = $2,100;
$2,100 X 4/12 = $700)
Equipment ……………………………………………………….
15,200**
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment ……………………………………………………..
11,200
Cash ……………………………………………………….
10,000
*Cost of old asset
$11,200
Less: Accumulated depreciation
($6,300 + $700)
7,000
Book value of equipment (old)
Less: Fair value of old asset
Gain on disposal of equipment
$ 1,000
**Cash paid
$10,000
Fair value of old asset
EXERCISE 10.18 (Continued)
(b)
Exchange lacks commercial substance:
Depreciation Expense ……………………………………………..
700
Accumulated Depreciation—Equipment …………..
700
$2,100 x 4/12 = $700)
Equipment ……………………………………………………………..
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment ……………………………………………………..
11,200
Cash ………………………………………………………………
10,000
**Cash paid
$10,000
Fair value of old asset
5,200
Cost of new asset
$15,200
EXERCISE 10.19 (15–20 minutes)
(a) Exchange lacks commercial substance.
Arruza Company:
Equipment ……………………………………………………….
12,000*
Accumulated Depreciation—Equipment ……………………
Equipment ………………………………………………………
Cash ……………………………………………………….
*Valuation of equipment
Book value of equipment given up
$ 9,000a
($28,000 – $19,000)
New equipment
Fair value received
Less: Gain deferred
**Fair value of old equipment
Less: Book value of old equipment
Note: Cash paid is less than 25% of the total amount given up, the
transaction is nonmonetary, so the gain is deferred.
Lo Bianco Company:
Cash …………………………..………………………………………….
3,000
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment ……………………
Loss on Disposal of Equipment …………………………..
Equipment ………………………………………………………
***Computation of loss:
EXERCISE 10.19 (Continued)
(b)
Exchange has commercial substance
Arruza Company
Equipment ……………………………………………………….
15,500*
Accumulated Depreciation—Equipment …………………..
19,000
Equipment ……………………………………………………..
28,000
Cash ……………………………………………………….
Gain on Disposal of Equipment ……………………….
Cash paid
Fair value of old equipment
Fair value of old equipment
Less: Book value of old equipment
LoBianco Company
Cash ………………………………………………………………………
3,000
Equipment ……………………………………………………….
12,500*
Accumulated Depreciation—Equipment (Old) ……………..
10,000
Loss on Disposal of Equipment …………………………..
2,500**
Equipment ……………………………………………………..
28,000
Fair value of equipment
Less: Cash received
Less: Fair value of equipment (Old)
EXERCISE 10.20 (15–20 minutes)
(a)
Exchange has commercial substance
Equipment ……………………………………………………….
56,900*
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment ……………………………………………………..
Cash ……………………………………………………….
*Valuation of equipment
Cash
$ 8,000
Installation cost
Market value of used equipment
Cost of new equipment
$56,900
**Computation of gain
Fair value of old asset
$47,800
Cost of old asset
Less: Accumulated depreciation
Book value of old asset
(42,000)
Gain on disposal of equipment
$ 5,800
(b)
Fair value information not determinable
Equipment ……………………………………………………….
51,100*
Accumulated Depreciation—Equipment …………………..
20,000
Equipment ……………………………………………………..
62,000
Cash ……………………………………………………….
9,100
Book value of old equipment
Cash paid (including installation costs)
Basis of new equipment