EXERCISE 10-23 (20–25 minutes)
(a) C
(b) E (immaterial)
EXERCISE 10-24 (20–25 minutes)
(a)
Depreciation Expense (8/12 X $60,000) ……………………..
40,000
Accumulated Depreciation—Machinery …………….
40,000
Loss on Disposal of Machinery …………………………..
($1,300,000 – $400,000) – $430,000
Cash ………………………………………………………………………
Accumulated Depreciation—Machinery …………………….
($360,000 + $40,000)
Machine ……………………………………………………….
(b)
Depreciation Expense (3/12 X $60,000) ……………………..
15,000
Accumulated Depreciation—Machinery …………….
15,000
Cash ………………………………………………………………………
1,040,000
Accumulated Depreciation—Machinery …………………….
($360,000 + $15,000)
Machine ……………………………………………………….
Gain on Disposal of Machinery …………………………
EXERCISE 10-24 (Continued)
(c)
Depreciation Expense (7/12 X $60,000) …………………….
35,000
Accumulated Depreciation—Machinery ……………
35,000
Contribution Expense ……………………………………………..
Accumulated Depreciation—Machinery ……………………
($360,000 + $35,000)
Machine ……………………………………………………….
Gain on Disposal of Machinery ………………………..
*$1,100,000 – ($1,300,000 – $395,000)
EXERCISE 10-25 (15–20 minutes)
April 1
430,000
160,000
60,000
280,000
250,000*
Aug. 1
90,000
400,000
490,000
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,
Problem 10-2 (Time 40–55 minutes)
Purpose—to provide a problem involving the proper classification of costs related to property, plant,
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.
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)
Problem 10-7 (Time 20–30 minutes)
Problem 10-8 (Time 35–45 minutes)
Purpose—to provide the student with a problem involving the exchange of machinery. Four different
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)
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.
SOLUTIONS TO PROBLEMS
PROBLEM 10-1
(a) REAGAN COMPANY
Analysis of Land Account
for 2014
Balance at January 1, 2014 ……………….
$ 230,000
Land site number 621
Acquisition cost ………………………………
Commission to real estate agent ………
Less: Amounts recovered ……………….
Total land site number 621 ……..
Land site number 622
Land value ………………………………………
300,000
Building value ………………………………….
Demolition cost ……………………………….
Total land site number 622 ……..
461,000
REAGAN COMPANY
Analysis of Buildings Account
for 2014
Balance at January 1, 2014 ………………………
$ 890,000
Cost of new building constructed
on land site number 622
Construction costs ………………………….
Architectural design fees …………………
Building permit fee ………………………….
PROBLEM 10-1 (Continued)
REAGAN COMPANY
Analysis of Leasehold Improvements Account
for 2014
Balance at January 1, 2014 ………………………………………..
$660,000
Balance at December 31, 2014 …………………………..
$749,000
REAGAN COMPANY
Analysis of Equipment Account
for 2014
Balance at January 1, 2014 ………………………………………..
$875,000
Cost of the new equipment acquired
Installation costs …………………………………………….
92,700
Balance at December 31, 2014 …………………………..
$967,700
(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.
PROBLEM 10-2
(a) LOBO CORPORATION
Analysis of Land Account
2014
Balance at January 1, 2014 ……………………………………..
$ 300,000
Plant facility acquired from Mendota
LOBO CORPORATION
Analysis of Land Improvements Account
2014
Balance at January 1, 2014 ……………………………………..
$ 140,000
LOBO CORPORATION
Analysis of Buildings Account
2014
Balance at January 1, 2014 ……………………………………..
$1,100,000
LOBO CORPORATION
Analysis of Equipment Account
2014
Balance at January 1, 2014 ……………………………………..
$ 960,000
Cost of new equipment acquired
Sales taxes …………………………………………………….
PROBLEM 10-2 (Continued)
Deduct cost of equipment disposed of
Equipment scrapped June 30, 2014 ………………….
$ 80,000*
Schedule 1
Computation of Fair Value of Plant Facility Acquired from
Mendota Company and Allocation to Land and Building
20,000 shares of Lobo common stock at $37 quoted
market price on date of exchange (20,000 X $37)
$740,000
Building
Building
($740,000 X 75%)
(b) Items in the fact situation that were not used to determine the answer
to (a) above, are as follows:
1. The tract of land, which was acquired for $150,000 as a potential
future building site, should be included in Lobo’s balance sheet
as an investment in land.
PROBLEM 10-2 (Continued)
3. The $12,080 loss (Schedule 2) incurred on the scrapping of a
machine on June 30, 2014, should be included in the other ex–
4. The $3,000 loss on sale of equipment on July 1, 2014 (Schedule 4)
should be included in the other expenses and losses section of
Schedule 2
Loss on Scrapping of Machine
June 30, 2014
Cost, January 1, 2006 …………………………………………………………..
$80,000
PROBLEM 10-2 (Continued)
Schedule 3
Accumulated Depreciation Using
Double-Declining-Balance Method
June 30, 2014
(Double-declining-balance rate is 20%)
Year
Book Value
at Beginning
of Year
Depreciation
Expense
Accumulated
Depreciation
2006
$80,000
$16,000
$16,000
2007
64,000
12,800
28,800
2010
32,768
6,554
53,786
2013
16,777
3,355
66,578
Schedule 4
Loss on Sale of Machine
July 1, 2014
Cost, January 1, 2011 ……………………………………………………….
$44,000
Asset book value ……………………………………………………………..
$23,000
Less: Proceeds from sale …………………………..…………………….
20,000
Depreciation (straight-line method, salvage value
PROBLEM 10-3
(a)
1.
Land (Schedule A) ……………………………………….
188,700
Buildings (Schedule B) ………………………………..
136,250
Insurance Expense (6 months X $95) …………….
570
Prepaid Insurance (16 months X $95) ……………
Organization Expense ………………………………….
610
Retained Earnings ……………………………………….
Salaries and Wages Expense ……………………….
Land and Buildings ……………………………..
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
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
2.
Land and Buildings ……………………………………..
4,000
Depreciation Expense ………………………….
2,637
Accumulated Depreciation—Buildings ….
1,363
PROBLEM 10-3 (Continued)
Schedule C
Depreciation taken …………………………..
$ 4,000
Depreciation that should be taken
(1% X $136,250) …………………………….
(1,363)
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)
should be reported as an extraordinary item on the income statement. If
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 ………………………………………….
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:
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.
Fair value of new machine ……………………………………….
$6,300
PROBLEM 10-5
(a) BLAIR CORPORATION
Cost of Land (Site #101)
As of September 30, 2015
Cost of land and old building ………………………………..
$500,000
Legal fees …………………………………………………………….
Title insurance ……………………………………………………..
Removal of old building ………………………………………..
54,000
(b) BLAIR CORPORATION
Cost of Building
As of September 30, 2015
Fixed construction contract price ………………………….
$3,000,000
Plans, specifications, and blueprints ……………………..
Interest capitalized during 2014 (Schedule 1) …………
Interest capitalized during 2015 (Schedule 2) …………
Cost of building ………………………………………………..
Schedule 1
Interest Capitalized During 2014 and 2015
Weighted-average
accumulated construction
expenditures
X
Interest rate
=
Interest to be
capitalized
2014:
$1,300,000
X
10%
=
$130,000*
2015:
$1,900,000
X
10%
=
PROBLEM 10-6
INTEREST CAPITALIZATION
Balance in the Land Account
Purchase Price ……………………………………………………………..
$139,000
Surveying Costs ……………………………………………………………
2,000
Title Insurance Policy ……………………………………………………
4,000
Salvage ………………………………………………………………………..
Expenditures (2014)
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 2014
Weighted—Average
Accumulated Expenditures
Interest
Rate
Amount
Capitalizable
PROBLEM 10-6 (Continued)
Expenditures (2015)
Fraction
Weighted
Expenditure
Date
Amount
1-Jan
$180,000
6/12
$ 90,000
1-Mar
4/12
80,000
Interest Capitalized for 2015
Weighted-
Average
Expenditure
Interest
Rate
Amount
Capitalizable
$225,600
(a) Balance in Land Account—2014 and 2015 …….. 147,000
(b) Balance in Building—2014 ……………………………. 34,200*
PROBLEM 10-7
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date
Amount
X
Capitalization
Period
=
Weighted-Average
Accumulated Expenditures
July 30, 2014
$ 900,000
10/12
$ 750,000
January 30, 2015
May 30, 2015
0
0
(b)
Weighted-Average
Accumulated Expenditures
X
Weighted-Average
Interest Rate
=
Avoidable
interest
$1,250,000
11.2%*
$140,000
Loans Outstanding During Construction Period
Principal
Actual Interest
(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 ……………………………………………….
*Computation of loss: Book value
Less: Fair value
Dorsett Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
45,000
Loss on Disposal of Machinery ………………………..
Cash ……………………………………………………….
Machinery ……………………………………………….
*Computation of loss: Book value
Less: Fair value
2.
Holyfield Corporation
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ………………………..
Machinery ……………………………………………….
Winston Company
Machinery ($92,000 – $11,000) …………………………
81,000*
Accumulated Depreciation—Machinery ……………
71,000
Machinery ……………………………………………….
PROBLEM 10-8 (Continued)
3.
Holyfield Corporation
Machinery ………………………………………………………
95,000
60,000
Machinery ……………………………………………….
160,000
Cash ……………………………………………………….
Liston Company
Machinery ………………………………………………………
92,000
Accumulated Depreciation—Machinery ……………
75,000
Cash ………………………………………………………………
3,000
Machinery ……………………………………………….
160,000
*Fair value
$ 95,000
Less: Book value
85,000
4.
Holyfield Corporation
Machinery ………………………………………………………
185,000
Accumulated Depreciation—Machinery ……………
60,000
Loss on Disposal of Machinery ……………………….
8,000
Machinery ……………………………………………….
Greeley Company
93,000
Inventory ……………………………………………………….
Cost of Goods Sold …………………………………………
Inventory …………………………..…………………….
PROBLEM 10-9
(a) Exchange has commercial substance:
Hyde, Inc.’s Books
Machinery (B)…………………………………………………..
75,000
Accumulated Depreciation—Machinery (A) ……….
40,000
Gain on Disposal of Machinery
($60,000 – [$96,000 – $40,000]) ……………….
Wiggins, Inc.’s Books
Cash ……………………………………………………………….
15,000
Machinery (A)…………………………………………………..
60,000
Accumulated Depreciation—Machinery (B) ……….
Machinery (B) ………………………………………….
Gain on Disposal of Machinery
($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
Machinery (A) ………………………………………….
*Computation of gain deferred:
Less: Book value