EXERCISE 10-6 (Continued)
2.
Equipment ……………………………………………………….
25,000
Cash ……………………………………………………….
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
Interest Rate
=
Avoidable Interest
$2,000,000
12%
$240,000
Weighted-average interest rate computation
Interest
10% short-term loan
$1,400,000
$140,000
11% long-term loan
$2,400,000
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
406,720
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
Computation of Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
.12 (Construction loan)
$ 360,000
$4,000,000 X 13%
Note: Use avoidable interest for capitalization purposes because it is lower than
actual.
EXERCISE 10-8 (Continued)
(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
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
$50,000
Interest revenue
$100,000 X 10% X 3/12 = $2,500
Avoidable interest
Weighted-Average
Accumulated Expenditures
X
Interest Rate
=
Avoidable Interest
EXERCISE 10-9 (Continued)
(b)
(1)
7/31
Cash ……………………………………………………..
300,000
Note Payable …………………………..
300,000
Machinery ………………………………………………
200,000
Trading Securities …………………………..
100,000
Cash ………………………………………………
300,000
(2)
11/1
Cash ……………………………………………………..
102,500
Interest Revenue
($100,000 X 10% X 3/12) ………………..
Trading Securities ………………………….
100,000
Machinery ………………………………………………
100,000
Cash ………………………………………………
100,000
(3)
12/31
Machinery ………………………………………………
6,000
Interest Expense
($17,400 – $6,000) …………………………..
Cash ($30,000 X 8%) ……………………….
Interest Payable
($300,000 X 12% X 5/12) ………………..
EXERCISE 10-10 (20–25 minutes)
Situation I. $80,000—The requirement is the amount Oksana Baiul should
report as capitalized interest at 12/31/14. The amount of interest eligible for
capitalization is
Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest
EXERCISE 10-10 (Continued)
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
amount eligible for capitalization.
Situation II. $39,000—The requirement is total interest costs to be
capitalized. GAAP identifies assets which qualify for interest capitalization:
Situation III. $385,000—The requirement is to determine the amount of
interest to be capitalized on the financial statements at April 30, 2008. The
GAAP requirements are met: (1) expenditures for the asset have been
EXERCISE 10-11 (10–15 minutes)
(a)
Equipment ……………………………………………………….
10,000
Accounts Payable …………………………………………..
10,000
Accounts Payable …………………………………………………..
Equipment ($10,000 X .02) …………………………..
(b)
Equipment (new) …………………………………………………….
9,900*
Loss on Disposal of Equipment …………………………..
1,600**
Accumulated Depreciation—Equipment …………………..
6,000
Accounts Payable …………………………………………..
Equipment (old) ………………………………………………
*Cost ($9,500 + $400)
**Cost
Less: Accumulated depreciation
Less: Fair value of equipment (old)
Accounts Payable …………………………………………………..
9,500
Cash ……………………………………………………….
(c)
Equipment ($10,800 X .91743) …………………………..
9,908
Discount on Note Payable ……………………………………….
892
($10,800 – $9,908)
Note Payable ………………………………………………….
Interest Expense …………………………………………………….
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 …………………………………………..
12,600*
*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:
Land
$400,000
X $2,100,000
= $350,000
$2,400,000
$800,000
EXERCISE 10-13 (Continued)
2.
Buildings ($105,000 plus $161,000) ………………………….
266,000
Equipment ……………………………………………………….
135,000
Land Improvements ………………………………………………..
122,000
Land ………………………………………………………………………
Cash ……………………………………………………….
541,000
Equipment ……………………………………………………….
265,300
Cash ……………………………………………………….
265,300
of $260,000.)
EXERCISE 10-14 (15–20 minutes)
(a)
Equipment ……………………………………………………….
576,765*
Discount on Notes Payable …………………………..
223,235
Notes Payable ………………………………………………..
800,000
*PV of $160,000 annuity @ 12% for 5 years
($160,000 X 3.60478) = $576,765
(b)
Interest Expense …………………………………………………….
Notes Payable ……………………………………………………….
160,000
Discount on Notes Payable …………………………..
Cash ……………………………………………………….
*(12% X $576,765)
Year
Note Payment
12% Interest
Reduction
of Principal
Balance
1/2/14
$576,765
12/31/15
EXERCISE 10-14 (Continued)
(c)
Interest Expense …………………………………………………….
58,317
Notes Payable ……………………………………………………….
160,000
Cash ……………………………………………………….
(d)
Depreciation Expense ……………………………………………..
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 ……………………………………………………….
Notes Payable ………………………………………………..
75,000.00
*PV of $15,000 annuity @ 10% for
5 years ($15,000 X 3.79079)
$56,861.85
Down payment
(b)
Notes Payable ……………………………………………………….
15,000.00
Interest Expense (see schedule) …………………………..
5,686.19
Cash ……………………………………………………….
Discount on Notes Payable …………………………..
Year
Note Payment
10% Interest
Reduction
of Principal
Balance
12/31/13
$56,861.85
EXERCISE 10-15 (Continued)
(c)
Notes Payable ……………………………………………………….
15,000.00
Interest Expense …………………………………………………….
4,754.80
Cash ……………………………………………………….
Discount on Notes Payable …………………………..
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
30,000
30/120
100,000
25,000
Machinery …………………………..…………………………..
Equipment ……………………………………………………….
Cash …………………………..…………………………..
Use the cash price as a basis for recording the asset with a discount
recorded on the note.
Machinery ……………………………………………………….
35,900
Discount on Notes Payable ($40,000 – $35,900) ……………..
Cash ……………………………………………………….
Notes Payable ………………………………………………..
EXERCISE 10-16 (Continued)
Acquisition Asset 4
Since the exchange lacks commercial substance, a gain will be recognized
in the proportion of cash received ($10,000/$80,000) times the $20,000 gain
(FMV of $80,000 minus BV of $60,000). The gain recognized will then be
Accumulated Depreciation—Machinery ……………………
Cash ………………………………………………………………………
Machinery ………………………………………………………
Gain on Disposal of Machinery ………………………..
Acquisition of Asset 5
In this case the Office Equipment should be placed on Hayes’s books at the
fair market value of the stock. The difference between the stock’s par value
Equipment ……………………………………………………….
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
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
=
$51,900
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
Sales Revenue ………………………………………………..
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 …………………..
7,000
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
Equipment (melter) …………………………………………………
15,200**
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment ……………………………………………………..
Cash ………………………………………………………………
**Cash paid
Fair value of old asset
Note that the entries are the same for both (a) and (b). Gain is not deferred
EXERCISE 10-19 (15–20 minutes)
(a) Exchange lacks commercial substance.
Carlos Arruza Company:
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment ……………………
Equipment ………………………………………………………
Cash ……………………………………………………….
Valuation of equipment
Book value of equipment given up
$ 9,000
Fair value of boot given up
3,000
New equipment
Fair value received
Less: Gain deferred
*Fair value of old equipment
Less: Book value of old equipment
Gain on disposal
Note: Cash paid is less than 25% of the total amount given up, the
transaction is nonmonetary, so the gain is deferred.
Tony 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
Carlos Arruza Company
Equipment ……………………………………………………….
15,500*
Accumulated Depreciation—Equipment …………………..
19,000
Equipment ……………………………………………………..
28,000
Cash ……………………………………………………….
3,000
Gain on Disposal of Equipment ……………………….
3,500**
*Cost of new equipment:
Cash paid
Fair value of old equipment
**Computation of gain on disposal of equipment:
Fair value of old equipment
Less: Book value of old equipment
($28,000 – $19,000)
9,000
Tony LoBianco Company
Cash ………………………………………………………………………
3,000
Equipment ……………………………………………………….
12,500*
Accumulated Depreciation—Equipment (Old) ……………..
10,000
Loss on Disposal of Equipment …………………………..
2,500**
Equipment ……………………………………………………..
28,000
*Cost of new equipment:
Fair value of equipment
**Computation of loss on disposal of equipment:
Book value of old equipment
($28,000 – $10,000)
$18,000
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
1,100
Market value of used equipment
47,800
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
Automatic Equipment ……………………………………………..
51,100*
Accumulated Depreciation—Equipment …………………..
Equipment ……………………………………………………..
Cash ……………………………………………………….
Book value of old equipment
Cash paid (including installation costs)
Basis of new equipment
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 …………………………..
24,900**
Buildings ……………………………………………………….
132,000
Cash ……………………………………………………….
5,100
*(5% X $132,000 = $6,600; $6,600 X 17 = $112,200)
**($132,000 – $112,200) + $5,100
3/10
Cash ($2,900 – $300) ……………………………………………….
2,600
Accumulated Depreciation—Machinery ……………………
11,200*
Loss on Disposal of Machinery …………………………..
2,200**
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
*(60% X $3,500 = $2,100)
**($3,500 – $2,100)
6/23
Maintenance and Repairs Expense ………………………….
6,900
Cash ……………………………………………………….
6,900