PROBLEM 10-6
INTEREST CAPITALIZATION
Balance in the Land Account
Purchase Price ……………………………………………………………..
$139,000
Surveying Costs ……………………………………………………………
2,000
Expenditures (2012)
Date
Amount
Fraction
1-Dec
$147,000
1/12
Interest Capitalized for 2012
Weighted—Average
Accumulated Expenditures
Interest
Rate
Amount
Capitalizable
Title Insurance Policy …………………………………………………….
4,000
Salvage …………………………………………………………………………
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
(a) Balance in Land Account—2012 and 2013 …….. 147,000
(b) Balance in Building—2012 …………………………... 34,200*
4/12
80,000
PROBLEM 10-7
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
(b)
Weighted-Average
Accumulated Expenditures
X
Weighted-Average
Interest Rate
=
Avoidable
interest
$1,250,000
11.2%*
$140,000
(c) (1) and (2)
Total actual interest cost
$560,000
Total interest capitalized
$140,000
Total interest expensed
$420,000
July 30, 2012
January 30, 2013
PROBLEM 10-8
1.
Holyfield Corporation
Cash ………………………………………………………………
23,000
Machinery ………………………………………………………
69,000
Accumulated Depreciation—Machinery ……………
60,000
Dorsett Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
45,000
Loss on Disposal of Machinery ……………………….
6,000*
Cash ……………………………………………………….
Machinery ……………………………………………….
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
Machinery ($92,000 – $11,000) …………………………
81,000*
Accumulated Depreciation—Machinery ……………
71,000
Book value
Loss on Disposal of Machinery ……………………….
Machinery ……………………………………………….
Fair value
PROBLEM 10-8 (Continued)
3.
Holyfield Corporation
Machinery ………………………………………………………
95,000
Liston Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
75,000
Cash ………………………………………………………………
Machinery ……………………………………………….
*Fair value
Book value
Because the exchange has commercial substance, the entire gain
should be recognized.
4.
Holyfield Corporation
Machinery ………………………………………………………
185,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
Machinery ……………………………………………….
Cash ……………………………………………………….
Greeley Company
Cash ………………………………………………………………
93,000
Inventory ……………………………………………………….
92,000
Sales Revenue …………………………………………
Cost of Goods Sold …………………………………………
Inventory …………………………..…………………….
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
Machinery ……………………………………………….
Cash ……………………………………………………….
PROBLEM 10-9
(a) Exchange has commercial substance:
Hyde, Inc.’s Books
Machinery (B) ………………………………………………….
75,000
Wiggins, Inc.’s Books
Cash ……………………………………………………………….
15,000
Accumulated Depreciation—Machinery (B) ……….
47,000
Machinery (B) …………………………..……………..
($75,000 – [$110,000 – $47,000]) ……………..
(b) Exchange lacks commercial substance:
Hyde, Inc.’s Books
Machinery (B) ($75,000 – $4,000) ………………………
71,000*
Accumulated Depreciation—Machinery (A) ……….
40,000
Cash ……………………………………………………….
Fair value
Book value
Machinery (A) …………………………..……………..
Gain on Disposal of Machinery
Cash ……………………………………………………….
PROBLEM 10-9 (Continued)
Wiggins, Inc.’s Books
Cash ………………………………………………………………
15,000
Machienry (A) …………………………………………………
50,400**
**Fair value of asset acquired
$60,000
Less: Gain deferred ($12,000 – $2,400)
9,600
Basis of Machinery A
$50,400
OR
Book value of Machinery B
Portion of book value sold
Accumulated Depreciation—Machinery (B) ………
47,000
Machienry (B) ………………………………………….
Gain on Disposal of Machinery …………………
Computation of total gain:
Fair value of Asset B
Book value of Asset B
Total gain
PROBLEM 10–10
(a) Has Commercial Substance
Marshall Construction
1.
Equipment ($82,000 + $118,000)………………….
200,000
Accumulated Depreciation—Equipment ……..
50,000
Brigham Manufacturing
2.
Cash …………………………………………………………
118,000
Inventory …………………………………………………..
82,000
Sales Revenue …………………………………..
Cost of Goods Sold ……………………………………
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.
Loss on Disposal of Equipment ………………….
Equipment…………………………………………
Cash …………………………………………………
PROBLEM 10-10 (Continued)
(c) Has Commercial Substance
Marshall Construction
1.
Equipment ($98,000 + $102,000) ………………….
200,000
Accumulated Depreciation—Equipment ……..
50,000
Equipment …………………………………………
140,000
Brigham Manufacturing
2.
Cash ………………………………………………………..
102,000
Inventory ………………………………………………….
98,000
Sales Revenue ………………………………….
200,000
Cost of Goods Sold …………………………………..
165,000
Inventory ………………………………………….
165,000
(d)
Marshall Construction
1.
Equipment ………………………………………………..
200,000
Accumulated Depreciation—Equipment …….
50,000
Cash ………………………………………………..
Equipment ………………………………………..
140,000
Gain on Disposal of Equipment ………….
change, so the gain is not deferred.
Cash …………………………………………………
Gain on Disposal of Equipment …………..
PROBLEM 10-10 (Continued)
Brigham Manufacturing
2.
Cash ……………………………………………………….
103,000
Inventory ………………………………………………….
97,000
Sales Revenue ………………………………….
200,000
Cost of Goods Sold …………………………………..
Inventory ………………………………………….
165,000
PROBLEM 10-11
(a) The major characteristics of plant assets, such as land, buildings, and
equipment, that differentiate them from other types of assets are
presented below.
1. Plant assets are acquired for use in the regular operations of the
enterprise and are not for resale.
2. Property, plant, and equipment possess physical substance or
(b) Transaction 1. To properly reflect cost, assets purchased on deferred
payment contracts should be accounted for at the present value of the
consideration exchanged between the contracting parties at the date
of the consideration. When no interest rate is stated, interest must
be imputed at a rate that approximates the rate that would be negoti–
ated in an arm’s-length transaction. In addition, all costs necessary to
PROBLEM 10-11 (Continued)
Transaction 2. The lump-sum purchase of a group of assets should be
accounted for by allocating the total cost among the various assets
on the basis of their relative fair values. The $8,000 of interest
expense incurred for financing the purchase is a period cost and is
not a factor in determining asset cost.
(c) 1. A building purchased for speculative purposes is not a plant
asset as it is not being used in normal operations. The building
is more appropriately classified as an investment.
2. The two-year insurance policy covering plant equipment is not a
plant asset because it has no physical substance and is not