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,
and equipment. Property, plant, and equipment must be segregated into land, buildings, leasehold
improvements, and machinery and equipment for purposes of the analysis. Such costs as demolition
costs, real estate commissions, imputed interest, minor and major repair work, and royalty payments
are presented. An excellent problem for reviewing the first part of this chapter.
Problem 10-2 (Time 40–55 minutes)
Purpose—to provide a problem involving the proper classification of costs related to property, plant,
and equipment. Such costs as land, freight and unloading, installation, parking lots, sales and use
taxes, and machinery costs must be identified and appropriately classified. An excellent problem for
reviewing the first part of this chapter.
Problem 10-3 (Time 35–45 minutes)
Purpose—to provide a problem involving the proper classification of costs related to land and buildings.
Typical transactions involve allocation of the cost of removal of a building, legal fees paid, general
expenses, cost of organization, special tax assessments, etc. A good problem for providing a broad
perspective as to the types of costs expensed and capitalized.
Problem 10-4 (Time 35–40 minutes)
Purpose—to provide a problem involving the method of handling the disposition of certain properties.
The dispositions include a condemnation, demolition, trade-in, contribution and sale to a stockholder.
The problem therefore involves a number of situations and provides a good overview of the accounting
treatment accorded property dispositions.
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
acquiring land and the costs of constructing a building. Interest costs are included.
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
plant, including interest capitalization.
Problem 10-7 (Time 20–30 minutes)
Purpose—to provide the student with a problem to compute capitalized interest and to present disclo–
sures related to capitalized interest.
Problem 10-8 (Time 35–45 minutes)
Purpose—to provide the student with a problem involving the exchange of machinery. Four different
exchange transactions are possible, and journal entries are required for each possible transaction. The
exchange transactions cover the receipt and disposition of cash as well as the purchase of a machine
from a dealer of machinery.
Problem 10-9 (Time 30–40 minutes)
Purpose—to provide a problem on the accounting treatment for exchanges of assets that have and do
not have commercial substance involving gain situations.
Problem 10-10 (Time 30–40 minutes)
Purpose—to provide the student with another problem involving the exchange of productive assets. This
problem is unusual because the size of the boot is greater than 25%. As a result, the entire transaction
is monetary in nature and all gains and losses are recognized.
Problem 10-11 (Time 35–45 minutes)
Purpose—to provide a property, plant, and equipment problem consisting of three transactions that
have to be recorded—(1) an asset purchased on a deferred payment contract, (2) a lump-sum purchase,
and (3) a nonmonetary exchange.
10–42
SOLUTIONS TO PROBLEMS
PROBLEM 10-1
(a) REAGAN COMPANY
Analysis of Land Account
for 2012
Balance at January 1, 2012 ……………….
Land site number 622
Land value ………………………………………
300,000
Building value ………………………………….
120,000
Demolition cost ……………………………….
41,000
Total land site number 622 ……..
Balance at December 31, 2012 ………….
REAGAN COMPANY
Analysis of Buildings Account
Balance at January 1, 2012 ………………………
Cost of new building constructed
on land site number 622
Construction costs ………………………….
Architectural design fees …………………
Building permit fee ………………………….
Balance at December 31, 2012 …………………
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 ……..
PROBLEM 10-1 (Continued)
REAGAN COMPANY
Analysis of Leasehold Improvements Account
for 2012
Balance at January 1, 2012 ………………………………………..
$660,000
REAGAN COMPANY
Analysis of Equipment Account
for 2012
Balance at January 1, 2012 ………………………………………..
$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 common stock financing is not permitted by
GAAP and thus does not appear in any financial statement.
10–44
PROBLEM 10-2
(a) LOBO CORPORATION
Analysis of Land Account
2012
Balance at January 1, 2012 ……………………………………..
$ 300,000
LOBO CORPORATION
Analysis of Land Improvements Account
2012
Balance at January 1, 2012 ……………………………………..
$ 140,000
LOBO CORPORATION
Analysis of Buildings Account
2012
Balance at January 1, 2012 ……………………………………..
$1,100,000
LOBO CORPORATION
Analysis of Equipment Account
2012
Balance at January 1, 2012 ……………………………………..
$ 960,000
Cost of new equipment acquired
Sales taxes …………………………………………………….
Plant facility acquired from Mendota
PROBLEM 10-2 (Continued)
Deduct cost of equipment disposed of
Equipment scrapped June 30, 2012 ………………….
$ 80,000*
Equipment sold July 1, 2012 …………………………..
Balance at December 31, 2012 …………………………..
of the problem.
Schedule 1
Computation of Fair Value of Plant Facility Acquired from
Mendota Company and Allocation to Land and Building
Amount
Percentage
of total
Land
$230,000
25
Building
690,000
75
Total
$920,000
100
Land
($740,000 X 25%)
$185,000
Building
($740,000 X 75%)
555,000
Total
$740,000
(b) Items in the fact situation that were not used to determine the answer
to (a) above, are as follows:
PROBLEM 10-2 (Continued)
3. The $12,080 loss (Schedule 2) incurred on the scrapping of a
4. The $3,000 loss on sale of equipment on July 1, 2012 (Schedule 4)
should be included in the other expenses and losses section of
Lobo’s income statement. The $21,000 accumulated depreciation
(Schedule 4) should be deducted from the Accumulated Depre-
ciation—Equipment account in Lobo’s balance sheet.
Schedule 2
Loss on Scrapping of Machine
June 30, 2012
10–47
PROBLEM 10-2 (Continued)
Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2012
(Double-declining-balance rate is 20%)
Year
Book Value
at Beginning
of Year
Depreciation
Expense
Accumulated
Depreciation
2004
$80,000
$16,000
$16,000
Schedule 4
Loss on Sale of Machine
July 1, 2012
Cost, January 1, 2009 ……………………………………………………….
$44,000
Asset book value …………………………..…………………………………
$23,000
Proceeds from sale ………………………………………………………….
2005
2008
6,554
2011
3,355
10–48
PROBLEM 10-3
(a)
1.
Land (Schedule A) …………………………..…………..
188,700
Buildings (Schedule B) ………………………………..
136,250
Insurance Expense (6 months X $95) …………….
570
Schedule A
Amount Consists of:
Acquisition Cost
($80,000 + [800 X $117]) ……………………..
$173,600
Removal of Old Building ………………………
9,800
Legal Fees (Examination of title) …………..
1,300
Special Tax Assessment ………………………
4,000
Total ………………………………………………
$188,700
Schedule B
Amount Consists of:
Legal Fees (Construction contract) ……….
$ 1,860
Construction Costs (First payment) ………
60,000
Construction Costs (Second payment) ….
Insurance (2 months)
([2,280 ÷ 24] = $95 X 2 = $190) …………….
4,200
Construction Costs (Final payment) ……..
30,000
Total ………………………………………………
$136,250
2.
Land and Buildings ……………………………………..
4,000
Depreciation Expense ………………………….
2,637
Accumulated Depreciation—Buildings ….
1,363
Prepaid Insurance (16 months X $95) ……………
Organization Expense ………………………………….
610
Retained Earnings ……………………………………….
Salaries and Wages Expense ……………………….
Land and Buildings …………………………..…
PROBLEM 10-3 (Continued)
Schedule C
Depreciation taken …………………………..
$ 4,000
Depreciation that should be taken
10–50
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)
Warehouse—The gain on the destruction of the warehouse should be reported
as an extraordinary item, assuming that it is unusual and infrequent. The
gain is computed as follows:
Insurance proceeds ………………………………..
$74,000
Deduct: Cost ………………………………………….
$70,000
Less: Accumulated depreciation …………
16,000
54,000
Realized gain ………………………………………….
$20,000
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:
Fair value of old machine ………………………….
Deduct: Book value of old machine
Cost …………………………………………………..
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
be capitalized at $4,550.
10–52
PROBLEM 10-5
(a) BLAIR CORPORATION
Cost of Land (Site #101)
As of September 30, 2013
Cost of land ……………………………………………………..
$614,000
(b) BLAIR CORPORATION
Cost of Building
As of September 30, 2013
Fixed construction contract price ………………………….
$3,000,000
Plans, specifications, and blueprints ……………………..
Interest capitalized during 2012 (Schedule 1) …………
Interest capitalized during 2013 (Schedule 2) …………
Cost of building ………………………………………………..
Schedule 1
Interest Capitalized During 2012 and 2013
Weighted-average
accumulated construction
expenditures
X
Interest rate
=
Interest to be
capitalized
Cost of land and old building ………………………………..
Legal fees …………………………………………………………….
Title insurance ……………………………………………………..
Removal of old building ………………………………………..
PROBLEM 10-6
INTEREST CAPITALIZATION
Balance in the Land Account
Expenditures (2012)
Weighted—Average
Accumulated Expenditures
Date
Amount
Fraction
1-Dec
$147,000
1/12
$12,250
1-Dec
30,000
1/12
2,500
Interest Capitalized for 2012
Weighted—Average
Accumulated Expenditures
Interest
Rate
Amount
Capitalizable
$15,000
8%
$1,200
10–54
PROBLEM 10-6 (Continued)
Expenditures (2013)
Fraction
Weighted
Expenditure
Date
Amount
1-Jan
$180,000
6/12
$ 90,000
Interest Capitalized for 2013
Weighted-
Average
Expenditure
Interest
Rate
Amount
Capitalizable
$225,600
8%
$18,048
1-Mar
4/12
80,000
PROBLEM 10-7
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
July 30, 2012
$ 900,000
10/12
$ 750,000
January 30, 2013
May 30, 2013
0
0
$4,000,000
$1,250,000
(b)
Weighted-Average
Accumulated Expenditures
X
Weighted-Average
Interest Rate
=
Avoidable
interest
$1,250,000
11.2%*
$140,000
Loans Outstanding During Construction Period
(c) (1) and (2)
Total actual interest cost
$560,000
Total interest capitalized
$140,000
Total interest expensed
$420,000
PROBLEM 10-8
1.
Holyfield Corporation
Cash ……………………………………………………….……..
23,000
Machinery ………………………………………………………
69,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
Machinery ……………………………………………….
160,000
*Computation of loss: Book value
Fair value
Dorsett Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
45,000
Loss on Disposal of Machinery ………………………..
6,000*
Cash ……………………………………………………….
23,000
Machinery ……………………………………………….
120,000
*Computation of loss: Book value
Fair value
2.
Holyfield Corporation
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
8,000
Machinery ……………………………………………….
160,000
Winston Company
81,000*
Accumulated Depreciation—Machinery ……………
71,000
Machinery ……………………………………………….
152,000
Book value
PROBLEM 10-8 (Continued)
3.
Holyfield Corporation
Machinery ………………………………………………………
95,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ……………………….
8,000
Machinery …………………………..…………………..
160,000
Cash ……………………………………………………….
3,000
Liston Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
75,000
Cash ………………………………………………………………
3,000
Machinery …………………………..…………………..
160,000
*Fair value
$ 95,000
Book value
(85,000)
Gain
$ 10,000
should be recognized.
4.
Holyfield Corporation
Machinery ………………………………………………………
185,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ……………………….
8,000
Machinery …………………………..…………………..
160,000
Cash ……………………………………………………….
93,000
Greeley Company
Cash ………………………………………………………………
93,000
Inventory ……………………………………………………….
92,000
Cost of Goods Sold …………………………………………
Inventory …………………………………………………
130,000
10–58
PROBLEM 10-9
(a) Exchange has commercial substance:
Hyde, Inc.’s Books
Wiggins, Inc.’s Books
Cash ……………………………………………………………….
15,000
Machinery (A)…………………………………………………..
60,000
Accumulated Depreciation—Machinery (B) ……….
47,000
Machinery (B) ………………………………………….
110,000
Gain on Disposal of Machinery
($75,000 – [$110,000 – $47,000]) ……………..
12,000
(b) Exchange lacks commercial substance:
Machinery (B) ($75,000 – $4,000) ……………………….
40,000
Machinery (A) ………………………………………….
*Computation of gain deferred:
Book value
Machinery (B)…………………………………………………..
75,000
40,000
96,000
Gain on Disposal of Machinery
15,000
PROBLEM 10-9 (Continued)
Wiggins, Inc.’s Books
Cash ………………………………………………………………
15,000
Machienry (A) …………………………………………………
50,400**
Accumulated Depreciation—Machinery (B) ………
47,000
Machienry (B) ………………………………………….
110,000
Gain on Disposal of Machinery …………………
2,400*
Computation of total gain:
Fair value of Asset B
Book value of Asset B
Total gain
*Gain recognized =
$15,000
X $12,000 = $2,400
$15,000 + $60,000
**Fair value of asset acquired
$60,000
Less: Gain deferred ($12,000 – $2,400)
9,600
Basis of Machinery A
$50,400
Book value of Machinery B
Portion of book value sold
PROBLEM 10-10
(a) Has Commercial Substance
Marshall Construction
1.
Equipment ($82,000 + $118,000) ………………….
200,000
50,000
Loss on Disposal of Equipment ………………….
Equipment …………………………………………
Cash …………………………………………………
Brigham Manufacturing
2.
Cash …………………………………………………………
118,000
Inventory …………………………..………………………
82,000
Sales Revenue …………………………………..
Cost of Goods Sold ……………………………………
165,000
Inventory …………………………………………..
(b) Lacks Commercial Substance
1. Marshall Construction should record the same entry as in part (a)
above, since the exchange resulted in a loss.