10–21
EXERCISE 10-6 (Continued)
2.
Equipment ……………………………………………………….
25,000
Cash ……………………………………………………….
2,000
Notes Payable ………………………………………………..
23,000
EXERCISE 10-7 (20–25 minutes)
(a)
Avoidable Interest
Weighted-Average
Accumulated Expenditures
X
=
Avoidable Interest
Weighted-average interest rate computation
Interest
10% short-term loan
$1,600,000
$160,000
11% long-term loan
$2,600,000
(b)
Actual Interest
Construction loan
$2,000,000 X 12% =
$240,000
Short-term loan
Long-term loan
$1,000,000 X 11% =
Equipment ……………………………………………………….
Accounts Payable ($20,000 X .98) …………………….
19,600
Land ………………………………………………………………………
Contribution Revenue …………………………..
27,000
Buildings ……………………………………………………….
Cash ……………………………………………………….
EXERCISE 10-7 (Continued)
Because avoidable interest is lower than actual interest, use
avoidable interest.
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
December 1
Note: Use avoidable interest for capitalization purposes because it is lower than
10–23
EXERCISE 10-8 (Continued)
(b)
Buildings ……………………………………………………….
180,000
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
Actual Interest
$400,000 X 12% X 5/12 =
$30,000 X 8% =
2,400
Interest capitalized
$ 9,000
10–24
EXERCISE 10-9 (Continued)
(b)
(1)
7/31
Cash ………………………………………………………
400,000
Notes Payable …………………………..
400,000
(2)
11/1
Cash ………………………………………………………
102,500
Interest Revenue
($100,000 X 10% X 3/12) ………………..
Debt Investments …………………………..
100,000
Machinery ………………………………………………
Cash ………………………………………………
100,000
(3)
12/31
Machinery ………………………………………………
9,000
Interest Expense
($22,400 – $9,000) …………………………..
Cash ($30,000 X 8%) ……………………….
Interest Payable
($400,000 X 12% X 5/12) ………………..
EXERCISE 10-10 (20–25 minutes)
Situation I. $90,000—The requirement is the amount Columbia should re–
port as capitalized interest at 12/31/12. The amount of interest eligible for
capitalization is
Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest
Machinery ………………………………………………
Debt Investments …………………………..
100,000
Cash ………………………………………………
EXERCISE 10-10 (Continued)
Finally, per GAAP (FASB ASC 835-20–30-10), 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 III. $330,000—The requirement is to determine the amount of
interest to be capitalized on the financial statements at April 30, 2013. 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 amount to be
capitalized is determined by applying an interest rate to the weighted–
EXERCISE 10-11 (10–15 minutes)
(a)
Equipment ……………………………………………………….
15,000
Accounts Payable …………………………………………..
15,000
15,000
Equipment ($15,000 X .02) …………………………..
10–26
EXERCISE 10-11 (Continued)
(b)
Equipment (new) …………………………………………………….
14,600*
Loss on Disposal of Equipment …………………………..
1,600**
Accumulated Depreciation—Equipment
($8,000 – $6,000) …………………………………………………
6,000
Accounts Payable …………………………………………..
14,200
Equipment (old) ………………………………………………
8,000
(c)
Equipment ($16,200 X .91743) …………………………..
14,862
Discount on Notes Payable
($16,200 – $14,862) ……………………………………………….
1,338
Notes Payable ………………………………………………..
16,200
Interest Expense …………………………………………………….
1,338
Notes Payable ……………………………………………………….
16,200
Discount on Notes Payable …………………………..
Cash ……………………………………………………….
16,200
**Cost
Accumulated depr.—equip.
Fair value
Accounts Payable …………………………………………………..
Cash ……………………………………………………….
10–27
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 14,000) …………………………
700,000
Paid-in Capital in Excess of Par—
Common Stock* …………………………………………
110,000
EXERCISE 10-13 (20–25 minutes)
1.
Land ………………………………………………………………………
375,000
Buildings ……………………………………………………….
1,125,000
Equipment ……………………………………………………….
Common Stock (12,500 X $100) ……………………….
($2,250,000 – $1,250,000) …………………………..
(c)
Machinery ……………………………………………………….
Materials ……………………………………………………….
12,500
Direct Labor ……………………………………………………
Factory Overhead …………………………………………..
*Fixed overhead applied (60% X $16,000) ………
Additional overhead…………………………………….
Factory supplies used …………………………………
900
10–28
EXERCISE 10-13 (Continued)
The cost of the property, plant and equipment is $2,250,000 (12,500 X
$180). This cost is allocated based on appraised values as follows:
Land
$400,000
X $2,250,000
= $375,000
$2,400,000
2.
Buildings ($105,000 plus $161,000) ………………………….
266,000
Equipment ……………………………………………………….
135,000
Land Improvements ………………………………………………..
122,000
Land ………………………………………………………………………
Cash ……………………………………………………….
3.
Equipment ……………………………………………………….
284,900
Cash ……………………………………………………….
of $280,000.)
EXERCISE 10-14 (15–20 minutes)
(a)
Equipment ……………………………………………………….
648,860*
Discount on Notes Payable …………………………..
251,140
Notes Payable ………………………………………………..
*PV of $180,000 annuity @ 12% for 5 years
($180,000 X 3.60478) = $648,860
(b)
Interest Expense …………………………………………………….
Notes Payable ……………………………………………………….
180,000
Discount on Notes Payable …………………………..
Cash ……………………………………………………….
*(12% X $648,860)
Year
Note Payment
12% Interest
Reduction
of Principal
Balance
1/2/12
$648,860
12/31/12
$180,000
$77,863
$102,137
546,723
12/31/13
180,000
65,607
114,393
432,330
Building
X $2,250,000
= $1,125,000
Equipment
$800,000
X $2,250,000
= $750,000
$2,400,000
EXERCISE 10-14 (Continued)
(c)
Interest Expense …………………………………………………….
65,607
Notes Payable ……………………………………………………….
180,000
Discount on Notes Payable …………………………..
Cash ……………………………………………………….
(d)
Depreciation Expense ……………………………………………..
EXERCISE 10-15 (15–20 minutes)
(a)
Equipment ……………………………………………………….
105,815.80*
Discount on Notes Payable ……………………………………..
24,184.20
Cash ……………………………………………………….
30,000.00
Notes Payable ………………………………………………..
100,000.00
*PV of $20,000 annuity @ 10% for
5 years ($20,000 X 3.79079)
Down payment
30,000.00
(b)
Notes Payable ……………………………………………………….
20,000.00
Interest Expense (see schedule) …………………………..
7,581.58
Cash ……………………………………………………….
20,000.00
Discount on Notes Payable …………………………..
7,581.58
(c)
Notes Payable ……………………………………………………….
Interest Expense …………………………………………………….
Cash ……………………………………………………….
20,000.00
Discount on Notes Payable …………………………..
10–30
EXERCISE 10-16 (25–35 minutes)
LOGAN INDUSTRIES
Acquisition of Assets 1 and 2
Use appraised values to break-out the lump-sum purchase
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) ……………..
Notes Payable ………………………………………………..
Acquisition of 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 $16,000 gain
(FMV of $80,000 minus BV of $64,000). The gain recognized will then be
$2,000 with $14,000 of it being unrecognized and used to reduce the basis
of the asset acquired.
Machinery ($70,000 – $14,000) …………………………..
Cash ………………………………………………………………………
Machinery ………………………………………………………
EXERCISE 10-16 (Continued)
Acquisition of Asset 5
In this case the Office Equipment should be placed on Logan’s books at
the fair value of the stock. The difference between the stock’s par value and
its fair value should be credited to Paid-in Capital in Excess of Par.
Equipment (100 X $11 per share) …………………………..
Common Stock ………………………………………………
Construction of Building
Schedule of Weighted-Average Accumulated Expenditures
Date
Amount
Current Year
Capitalization
Period
Weighted-Average
Accumulated
Expenditures
February 1
$ 180,000
9/12
$135,000
February 1
120,000
9/12
90,000
June 1
360,000
5/12
September 1
480,000
2/12
80,000
$1,240,000
Note that the capitalization is only 9 months in this exercise.
Avoidable Interest
Weighted-Average
Accumulated Expenditures
Avoidable Interest
$455,000
X
=
$54,600
Land ………………………………………………………………………
Buildings ……………………………………………………….
10–32
EXERCISE 10-17 (10–15 minutes)
Alatorre Corporation
Machinery ($320 + $85) …………………………..……………….
405
Accumulated Depreciation—Machinery ……………………
140
Mills Business Machine Company
Cash ………………………………………………………………………
320
Inventory ………………………………………………………………..
85
Cost of Goods Sold …………………………………………………
270
Sales Revenue ………………………………………………..
405
Inventory ……………………………………………………….
270
EXERCISE 10-18 (20–25 minutes)
(a)
Exchange has commercial substance:
Depreciation Expense ……………………………………………..
800
($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 ……………………….
500*
Equipment ……………………………………………………..
Cash ……………………………………………………….
Accumulated Depreciation—
Loss on Disposal of Machinery …………………………..
Machinery ………………………………………………………
290
Cash ……………………………………………………….
*Computation of loss:
Book value of old machine ($290 – $140)
Less: Fair value of old machine
EXERCISE 10-18 (Continued)
*Cost of old asset
$12,700
Accumulated depreciation
($7,200 + $800)
(8,000)
Book value
Less: Fair value of old asset
Gain on disposal of equipment
**Cash paid
Fair value of old equipment
(b)
Exchange lacks commercial substance:
Depreciation Expense ……………………………………………..
800
Accumulated Depreciation—Equipment …………..
800
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
500
Equipment ……………………………………………………..
Cash ……………………………………………………….
**Cash paid
Fair value of old asset
Note that the entries are the same for both (a) and (b). The gain is not deferred
because cash boot is greater than 25%, which makes the transaction mone-
tary in nature.
10–34
EXERCISE 10-19 (15–20 minutes)
(a) Exchange lacks commercial substance.
Valuation of equipment
Book value of equipment given
$ 9,000
Cash paid
2,000
New equipment
$11,000
OR
Fair value received
Less: Gain deferred
New equipment
*Fair value of old equipment
Book value of old equipment
Gain on disposal of equipment
Note: Cash paid is less than 25%, the transaction is nonmonetary, so
the gain is deferred.
Delaware Company:
Cash ………………………………………………………………………
2,000
Equipment ……………………………………………………….
13,500
Accumulated Depreciation—Equipment ……………………
Loss on Disposal of Equipment …………………………..
Equipment ………………………………………………………
*Computation of loss:
Book value of old equipment
Fair value of old equipment
Loss on disposal of equipment
Santana Company:
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment ……………………
Equipment ………………………………………………………
Cash ……………………………………………………….
EXERCISE 10-19 (Continued)
(b)
Exchange has commercial substance
Santana Company
Equipment ……………………………………………………….
15,500*
Accumulated Depreciation—Equipment …………………..
19,000
Equipment ……………………………………………………..
Cash ……………………………………………………….
Gain on Disposal of Equipment ……………………….
*Cost of new equipment:
Cash paid
$ 2,000
Fair value of old equipment
Cost of new equipment
$15,500
**Computation of gain on disposal of equipment:
Fair value of old equipment
$13,500
Less: Book value of old
equipment
($28,000 – $19,000)
9,000
Gain on disposal of equipment
$ 4,500
Cash ………………………………………………………………………
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment (Old) ……………..
Loss on Disposal of Equipment …………………………..
Equipment ……………………………………………………..
*Cost of new equipment:
Fair value of equipment
$15,500
Less: Cash received
2,000
Cost of new equipment
$13,500
**Computation of loss on disposal of equipment:
10–36
EXERCISE 10-20 (15–20 minutes)
(a)
Exchange has commercial substance
Valuation of equipment
Cash
$ 7,000
Installation cost
1,100
Market value of used equipment
45,800
Cost of new equipment
$53,900
Cost of old asset
Accumulated depreciation
Book value
Less: Fair value of old asset
Gain on disposal of equipment
(b)
Fair value not determinable
Equipment ……………………………………………………….
50,100*
Accumulated Depreciation—Equipment …………………..
20,000
Equipment ……………………………………………………..
62,000
Cash ……………………………………………………….
8,100
Book value of old equipment
Cash paid (including installation costs)
Basis of new equipment
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………..
Gain on Disposal of Equipment ……………………….
Equipment ……………………………………………………..
Cash ($7,000 + $1,100) …………………………..
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 followed.
One approach is to capitalize the replacement on the theory that suffi–
cient depreciation was taken on the old system to reduce the carrying
10–38
EXERCISE 10-22 (15–20 minutes)
1/30
Accumulated Depreciation—Buildings …………………….
95,200*
Loss on Disposal of Plant Assets …………………………..
21,900**
Buildings ……………………………………………………….
112,000
Cash ……………………………………………………….
5,100
*(5% X $112,000 = $5,600; $5,600 X 17 = $95,200)
**($112,000 – $95,200) + $5,100
3/10
Cash ($2,900 – $300) ……………………………………………….
Accumulated Depreciation—Machinery ……………………
Loss on Disposal of Machinery …………………………..
2,200**
*(70% X $16,000 = $11,200)
**($16,000 – $11,200) + $300 – $2,900
3/20
Maintenance and Repairs Expense ………………………….
3,000
Cash ……………………………………………………….
5/18
Machinery ……………………………………………………….
Accumulated Depreciation—Machinery ……………………
Loss on Disposal of Machinery …………………………..
Machinery ………………………………………………………
Cash ……………………………………………………….
5,500
*(60% X $4,000 = $2,400)
**($4,000 – $2,400)
6/23
Maintenance and Repairs Expense ………………………….
6,900
Cash ……………………………………………………….
6,900
EXERCISE 10-23 (10–15 minutes)
EXERCISE 10-24 (20–25 minutes)
(a)
Depreciation Expense (8/12 X $72,000) ……………………..
48,000
Accumulated Depreciation—
Machinery …………………………………………………….
48,000
Loss on Disposal of Machinery
($1,300,000 – $408,000) – $630,000 …………………………
Cash ……………………………………………………………………….
Accumulated Depreciation—Machinery
Machinery ……………………………………………………….
(b)
Depreciation Expense (3/12 X $72,000) ……………………..
18,000
Accumulated Depreciation—
Machinery …………………………………………………….
18,000
Cash ………………………………………………………………………
Accumulated Depreciation—Machinery
($360,000 + $18,000) ……………………………………………..
Machinery ……………………………………………………….
Gain on Disposal of Machinery
[$1,040,000 – ($1,300,000 – $378,000)] ……………….
(c)
Depreciation Expense (7/12 X $72,000) ……………………..
42,000
Accumulated Depreciation—
Machinery …………………………………………………….
42,000
Contribution Expense ………………………………………………
Accumulated Depreciation—Machinery
($360,000 + $42,000) ……………………………………………..
Machinery ……………………………………………………….
Gain on Disposal of Machinery …………………………
*$1,100,000 – $1,300,000 + $402,000
10–40
EXERCISE 10-25 (15–20 minutes)
April 1
Cash ……………………………………………………….
410,000
Accumulated Depreciation—Buildings ……………………..
160,000
Land ……………………………………………………….
60,000
Buildings ……………………………………………………….
280,000
Gain on Disposal of Plant Assets ……………………..
230,000*
Aug. 1
Land ……………………………………………………………………….
Buildings ……………………………………………………….
380,000
Cash ……………………………………………………….
470,000