Brief Exercise 10-1
Riverbed Inc. purchased land at a price of $27,300. Closing costs were $2,310. An old
building was removed at a cost of $15,090. What amount should be recorded as the cost of
the land?
The cost of land to be recorded
$
44700
Brief Exercise 10-2
Shamrock Company is constructing a building. Construction began on February 1 and was
completed on December 31. Expenditures were $2,040,000 on March 1, $1,320,000 on June
1, and $3,031,130 on December 31. Compute Shamrock’s weighted-average accumulated
expenditures for interest capitalization purposes.
Weighted-Average Accumulated Expenditures
Date
Amount
3/1
$2,040,000
6/1
1,320,000
12/31 3,031,130
$6,391,130
$
2470000
Capitalization
Weighted-Average
Period
Accumulated Expenditures
10/12
7/12
0
$1,700,000
770,000
0
$2,470,000
Brief Exercise 10-3
Swifty Company is constructing a building. Construction began on February 1 and was
completed on December 31. Expenditures were $2,052,000 on March 1, $1,200,000 on June
1, and $3,007,200 on December 31.
Swifty Company borrowed $1,042,720 on March 1 on a 5-year, 13% note to help finance
construction of the building. In addition, the company had outstanding all year a 9%, 5-year,
$2,039,800 note payable and an 10%, 4-year, $3,462,500 note payable. Compute the
weighted-average interest rate used for interest capitalization purposes. (Round answer to 2
decimal places, e.g. 7.58%.)
Weighted-average interest rate
9.63
%
Principal Interest
9%, 5-year note $2,039,800 $183,582
10%, 4-year note 3,462,500 346,250
$5,502,300 $529,832
Weighted-average interest rate =
$529,832
= 9.63%
$5,502,300
Brief Exercise 10-4
Novak Company is constructing a building. Construction began on February 1 and was
completed on December 31. Expenditures were $2,064,000 on March 1, $1,212,000 on June
1, and $3,017,300 on December 31.
Novak Company borrowed $1,158,300 on March 1 on a 5-year, 12% note to help finance
construction of the building. In addition, the company had outstanding all year a 10%, 5-year,
$2,118,200 note payable and an 11%, 4-year, $3,544,100 note payable. Compute avoidable
interest for Novak Company. Use the weighted-average interest rate for interest capitalization
purposes. (Round percentages to 2 decimal places, e.g. 2.51% and final answer to 0 decimal
places, e.g. 5,275.)
Avoidable interest
Date
Amount
3/1
$2,064,000
6/1
1,212,000
12/31 3,017,300
$6,293,300
$
273859
Capitalization
Weighted-Average
Period
Accumulated Expenditures
10/12
7/12
0
$1,720,000
707,000
0
$2,427,000
Principal Interest
10%, 5-year note $2,118,200 $211,820
11%, 5-year note 3,544,100 389,851
$5,662,300 $601,671
Weighted-average interest rate
=
$601,671
= 10.63%
$5,662,300
Weighted-Average
Accumulated Expenditures
Interest Avoidable
× Rate = Interest
$1,158,300
12% $138,996
1,268,700 10.63% 134,863
$2,427,000
$273,859
Brief Exercise 10-5
Riverbed Corporation purchased a truck by issuing an
$100,800, 5-year, zero-interest-bearing note to Equinox Inc.
The market rate of interest for obligations of this nature
is 11%.
Prepare the journal entry to record the purchase of this
truck. (Round present value factor calculations to 5 decimal
places, e.g. 1.25124 and final answers to 0 decimal places,
e.g. 5,275. Credit account titles are automatically indented
when amount is entered. Do not indent manually. If no entry
is required, select "No Entry" for the account titles and enter
0 for the amounts.)
Account Titles and Explanation
Debit
Trucks
59820
Discount on N
40980
Notes Payable
Credit
100800
Trucks = ($100,800 x 0.59345) = $59,820 (See table 6.2 for PVFn,i)
Brief Exercise 10-6
Shamrock Inc. purchased land, building, and equipment from Laguna Corporation for a cash
payment of $434,700. The estimated fair values of the assets are land $82,800, building
$303,600, and equipment $110,400. At what amounts should each of the three assets be
recorded? (Round intermediate percentage calculations to 5 decimal places e.g. 18.25124 and
final answers to 0 decimal places, e.g. 5,275.)
Recorded Amount
Land
Building
Equipment
$
72450
$
265650
$
96600
Fair Value % of Total
Cost
Recorded Amount
Land
$82,800 82.80/496.80 × $434,700
$72,450
Building
303,600 303.60/496.80 × $434,700
265,650
Equipment
110,400 110.40/496.80 × $434,700
96,600
$496,800
$434,700
Brief Exercise 10-7
Cullumber Company obtained land by issuing 3,370 shares of its $20 par value common
stock. The land was recently appraised at $172,760. The common stock is actively traded at
$50 per share.
Prepare the journal entry to record the acquisition of the land. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Land
Land
Debit
Credit
168500
Common Stock
67400
Paid-in Capital
101100
= (3,370 × $50) = $168,500
Common Stock = (3,370 × $20) = $67,400
Brief Exercise 10-8
Stellar Corporation traded a used truck (cost $23,600, accumulated depreciation $21,240) for
a small computer with a fair value of $3,894. Stellar also paid $590 in the transaction.
Prepare the journal entry to record the exchange. (The exchange has commercial
substance.) (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for
the amounts.)
Account Titles and Explanation
Debit
Equipment
3894
Accumulated D
21240
Credit
Gain on Dispo
944
Cash
590
Trucks
23600
Brief Exercise 10-9
Larkspur Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000)
for a small computer worth $4,158. Larkspur also paid $630 in the transaction.
Prepare the journal entry to record the exchange, assuming the exchange lacks commercial
substance. (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for
the amounts.)
Account Titles and Explanation
Debit
Equipment
2630
Accumulated D
18000
Credit
Cash
630
Trucks
20000
Equipment = ($4,158 – $1,528) = $2,630
Brief Exercise 10-10
Tamarisk Company traded a used welding machine (cost $12,420, accumulated depreciation
$4,140) for office equipment with an estimated fair value of $6,900. Tamarisk also paid
$4,140 cash in the transaction.
Prepare the journal entry to record the exchange. (The exchange has commercial
substance.) (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Account Titles and Explanation
Debit
Equipment
6,900
Accumulated D
4,140
Loss on Dispo
5,520
Credit
Machinery
12,420
Cash
4,140
Brief Exercise 10-11
Monty Company traded a used truck for a new truck. The used truck cost $46,500 and has
accumulated depreciation of $41,850. The new truck is worth $57,350. Monty also made a cash
payment of $55,800.
Prepare Monty’s entry to record the exchange. (The exchange lacks commercial
substance.) (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Account Titles and Explanation
Debit
Trucks (new )
57,350
Accumulated Depreciation-Trucks
41,850
Loss on Disposal of Trucks
3,100
Credit
Trucks (used)
46,500
Cash
55,800
Brief Exercise 10-12
Skysong Corporation traded a used truck for a new truck. The used truck cost $24,200 and has
accumulated depreciation of $20,570. The new truck is worth $42,350. Skysong also made a cash
payment of $39,930.
Prepare Skysong’s entry to record the exchange. (The exchange has commercial
substance.) (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Account Titles and Explanation
Debit
Trucks (new )
42,350
Accumulated Depreciation-Trucks
20,570
Loss on Disposal of Trucks
1,210
Credit
Trucks (used)
24,200
Cash
39,930
Brief Exercise 10-13
Indicate which of the following costs should be expensed when incurred.
(a) $13,000 paid to rearrange and reinstall machinery.
No
(b) $200,000 paid for addition to building.
No
(c) $200 paid for tune-up and oil change on delivery truck.
Yes
(d) $7,000 paid to replace a wooden floor with a concrete floor.
No
(e) $2,000 paid for a major overhaul on a truck, which extends the useful life.
No
Brief Exercise 10-14
Culver Corporation owns machinery that cost $24,000 when purchased on July 1, 2014.
Depreciation has been recorded at a rate of $2,880 per year, resulting in a balance in accumulated
depreciation of $10,080 at December 31, 2017. The machinery is sold on September 1, 2018, for
$12,600.
Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Depreciation E
Debit
1,920
Accumulated D
(b)
Credit
1,920
Cash
12,600
Accumulated D
12,000
Machinery
24,000
Gain on Dispo
600
(a) Depreciation Expense
= ($2,880 × 8/12)
= $1,920
(b) Accumulated Depreciation-Machinery = ($10,080 + $1,920) = $12,000
Brief Exercise 10-15
Carla Corporation owns machinery that cost $25,600 when purchased on July 1, 2014.
Depreciation has been recorded at a rate of $3,072 per year, resulting in a balance in accumulated
depreciation of $10,752 at December 31, 2017. The machinery is sold on September 1, 2018, for
$6,656.
Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale. (Round
answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
Debit
Credit
(a)
Depreciation E
2,048
Accumulated D
(b)
2,048
Cash
6,656
Loss on Dispo
6,144
Accumulated D
12,800
Machinery
25,600
(a) Depreciation Expense
= ($3,072 × 8/12)
= $2,048
(b) Accumulated Depreciation-Machinery = ($10,752 + $2,048) = $12,800
Exercise 10-1
The expenditures and receipts below are related to land, land improvements, and buildings
acquired for use in a business enterprise. The receipts are enclosed in parentheses.
(a)
Money borrowed to pay building contractor (signed a note)
$(280,800 )
(b)
Payment for construction from note proceeds
(c)
Cost of land fill and clearing
(d)
Delinquent real estate taxes on property assumed by purchaser
(e)
Premium on 6-month insurance policy during construction
12,360
(f)
Refund of 1-month insurance premium because construction completed early
(2,060 )
(g)
Architect’s fee on building
28,020
(h)
Cost of real estate purchased as a plant site (land $208,600 and building $50,000)
(i)
Commission fee paid to real estate agency
8,480
(j)
Installation of fences around property
3,960
(k)
Cost of razing and removing building
10,190
(l)
Proceeds from salvage of demolished building
(4,840 )
280,800
12,020
7,470
258,600
(m) Interest paid during construction on money borrowed for construction
12,880
(n)
Cost of parking lots and driveways
18,540
(o)
Cost of trees and shrubbery planted (permanent in nature)
13,540
(p)
Excavation costs for new building
3,100
Identify each item by letter and list the items in columnar form, using the headings shown below.
All receipt amounts should be reported in parentheses. (Enter receipt amounts using either a
negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Item
(a)
Land
$enter a dollar
amount
Land
Improvements
$enter a dollar
amount
Building
$enter a dollar
amount
Other Non-Property,
Plant,
and Equipment
$enter a dollar amount
(280,800)
(b)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
280,800
(c)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
12,020
(d)
enter a dollar
amount
7,470
(e)
enter a dollar
amount
12,360
(f)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
(2,060)
enter a dollar amount
(g)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
28,020
(h)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
258,600
(i)
enter a dollar
amount
8,480
(j)
enter a dollar
amount
3,960
(k)
enter a dollar
amount
10,190
(l)
enter a dollar
amount
(4,840)
(m)
enter a dollar
amount
12,880
(n)
enter a dollar
amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
enter a dollar
amount
enter a dollar
amount
enter a dollar amount
18,540
(o)
enter a dollar
amount
13,540
(p)
enter a dollar
amount
3,100
No PPE accounts are affect by the transaction in (a). The entry would be:
Debit
Cash
Notes Payable
Credit
275,000
275,000
Exercise 10-4
Sweet Co. both purchases and constructs various equipment it uses in its operations. The following
items for two different types of equipment were recorded in random order during the calendar
year 2017.
Purchase
Cash paid for equipment, including sales tax of $6,900
$144,900
Freight and insurance cost while in transit
2,760
Cost of moving equipment into place at factory
4,278
Wage cost for technicians to test equipment
5,520
Insurance premium paid during first year of operation on this equipment
2,070
Special plumbing fixtures required for new equipment
Repair cost incurred in first year of operations related to this equipment
11,040
1,794
Construction
Material and purchased parts (gross cost $276,000; failed to take 2% cash
discount)
Imputed interest on funds used during construction (stock financing)
Labor costs
$276,000
19,320
262,200
Allocated overhead costs (fixed-$27,600; variable-$41,400)
69,000
Profit on self-construction
41,400
Cost of installing equipment
6,072
Compute the total cost for each of these two pieces of equipment.
$
Purchase equipment
168,498
$
Construction equipment
607,752
Purchase
Cash paid for equipment, including sales tax of $6,900
Freight and insurance while in transit
Cost of moving equipment into place at factory
Wage cost for technicians to test equipment
Special plumbing fixtures required for new equipment
Total cost
$144,900
2,760
4,278
5,520
11,040
$168,498
The insurance premium paid during the first year of operation of this equipment should be
reported initially as prepaid insurance and then adjusted to insurance expense, and not be
capitalized. Repair cost incurred in the first year of operations related to this equipment should be
reported as repair and maintenance expense, and not be capitalized. Both these costs relate to
periods subsequent to purchase.
Construction
Material and purchased parts ($276,000 × 0.98) $270,480
Labor costs
262,200
Overhead costs
69,000
Cost of installing equipment
6,072
Total cost
$607,752
Note that the cost of material and purchased parts is reduced by the amount of cash discount not
taken because the equipment should be reported at its cash equivalent price. The imputed interest
on funds used during construction related to stock financing should not be capitalized or
expensed. This item is an opportunity cost that is not reported.
Profit on self-construction should not be reported. Profit should only be reported when the asset is
sold.
Exercise 10-5
Vaughn Supply Company, a newly formed corporation, incurred the following expenditures
related to Land, to Buildings, and to Machinery and Equipment.
Abstract company’s fee for title search
$884
Architect’s fees
5,389
Cash paid for land and dilapidated building thereon
Removal of old building
Less: Salvage
147,900
$34,000
9,350
24,650
Interest on short-term loans during construction
12,580
Excavation before construction for basement
32,300
Machinery purchased (subject to 2% cash discount, which was not taken)
93,500
Freight on machinery purchased
2,278
Storage charges on machinery, necessitated by noncompletion of
building when machinery was delivered
3,706
New building constructed (building construction took 6 months from
date of purchase of land and old building)
824,500
Assessment by city for drainage project
2,720
Hauling charges for delivery of machinery from storage to new building
1,054
Installation of machi3nery
3,400
Trees, shrubs, and other landscaping after completion of building
(permanent in nature)
9,180
Determine the amounts that should be debited to Land, to Buildings, and to Machinery and
Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of
implementation. Company uses net method to record discount. (Please leave spaces blank if there
is no answer. Do not enter zeros in those spaces.)
Land
Buildings
$
Abstract company’s fee for title
search
Machinery and
Equipment
Other
$
$
$
884
5,389
Architect’s fees
Cash paid for land and old
building
147,900
Removal of old building
24,650
Interest on short-term loans
during construction
12,580
Excavation before construction
for basement
32,300
Machinery purchased
91,630
Freight on machinery purchased
2,278
1,870
3,706
Storage charges on machinery
824,500
New building constructed
Assessment by city for drainage
project
2,720
1,054
Hauling charges
3,400
Installation of machinery
Trees, shrubs, and other
landscaping
9,180
$
185,334
Exercise 10-7
$
874,769
$
$
97,308
6,630
Stellar Furniture Company started construction of a combination office and warehouse building
for its own use at an estimated cost of $5,000,800 on January 1, 2017. Stellar expected to complete
the building by December 31, 2017. Stellar has the following debt obligations outstanding during
the construction period.
Construction loan-12% interest, payable semiannually, issued December 31, 2016
Short-term loan-10% interest, payable monthly, and principal payable at maturity on
May 30, 2018
Long-term loan-11% interest, payable on January 1 of each year. Principal payable
on January 1, 2021
$1,994,600
1,593,100
995,900
Assume that Stellar completed the office and warehouse building on December 31, 2017, as
planned at a total cost of $5,236,900, and the weighted-average amount of accumulated
expenditures was $3,795,900. Compute the avoidable interest on this project. (Use interest rates
rounded to 2 decimal places, e.g. 7.58% for computational purposes and round final answers to 0
decimal places, e.g. 5,275.)
$
Avoidable Interest
426,327
Avoidable Interest
Weighted-Average
Interest
Avoidable
Accumulated Expenditures × Rate = Interest
$1,994,600
12%
$239,352
1,801,300
10.38%
186,975
$3,795,900
$426,327
Weighted-average interest rate computation
10% short-term loan
Principal
Interest
$1,593,100 $159,310
11% long-term loan
995,900
109,549
$2,589,000 $268,859
Total Interest
$268,859
=
Total Principal $2,589,000
= 10.38%
Compute the depreciation expense for the year ended December 31, 2018. Stellar elected to
depreciate the building on a straight-line basis and determined that the asset has a useful life
of 30 years and a salvage value of $302,700. (Round answer to 0 decimal places, e.g. 5,275.)
Depreciation Expense
$
178,684
Actual Interest
Construction loan $1,994,600 × 12% = $239,352
Short-term loan $1,593,100 × 10% = 159,310
Long-term loan
$995,900 × 11% = 109,549
Total
$508,211
Because avoidable interest is lower than actual interest, use avoidable interest.
Cost
$5,236,900
Interest capitalized
426,327
Total cost
$5,663,227
$5,663,227 – $302,700
Depreciation Expense =
30 years
= $178,684
Exercise 10-11
Ivanhoe Engineering Corporation purchased conveyor equipment with a list price of $10,800.
Presented below are three independent cases related to the equipment.
(a) Ivanhoe paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are
2/10, n/30. Assume that equipment purchases are initially recorded gross.
(b) Ivanhoe traded in equipment with a book value of $1,900 (initial cost $7,200), and paid
$9,300 in cash one month after the purchase. The old equipment could have been sold for
$300 at the date of trade. (The exchange has commercial substance.)
(c) Ivanhoe gave the vendor a $11,400 zero-interest-bearing note for the equipment on the date of
purchase. The note was due in one year and was paid on time. Assume that the effectiveinterest rate in the market was 8%.
Prepare the general journal entries required to record the acquisition and payment in each of the
independent cases above. (Round present value factor calculations to 5 decimal places, e.g.
1.25124 and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
(a)
Equipment
Debit
Credit
10,800
Accounts Payable
10,800
(To record the purchase of equipment on account.)
Accounts Payable
10,800
Equipment
216
Cash
10,584
(To record the payment on account.)
(b)
Equipment (New )
9,600
Loss on Disposal of Equipment
1,600
Accumulated Depreciation- Equipment
5,300
Accounts Payable
9,300
Equipment (Old)
7,200
(To record the purchase of equipment on account.)
Accounts Payable
9,300
Cash
9,300
(To record the payment on account.)
(c)
Equipment
10,556
Discount on Notes Payable
844
Notes Payable
(To record the purchase of equipment with a note.)
11,400
Interest Expense
844
Notes Payable
11,400
Discount on Notes Payable
844
Cash
11,400
(To record the payment of the note.)
(a) Equipment
= ($10,800 × 0.02) = $216
(b) Accumulated Depreciation-Equipment = ($7,200 – $1,900) = $5,300
Cost
$7,200
Less: Accumulated depreciation
5,300
Book value of equipment (old)
1,900
Less: Fair value of equipment (old)
300
Loss on disposal of equipment
$1,600
Cost ($9,300 + $300)
$9,600
(c) Equipment
= ($11,400 × 0.92593) = $10,556
Discount on Notes Payable = ($11,400 – $10,556) = $844
Exercise 10-16
Pina Industries purchased the following assets and constructed a building as well. All this was done
during the current year.
Assets 1 and 2: These assets were purchased as a lump sum for $340,000 cash. The following
information was gathered.
Description
Initial Cost on
Seller’s Books
Depreciation to
Date on Seller’s Books
Book Value on
Seller’s Books
Appraised Value
Machinery
$340,000
$170,000
$170,000
$306,000
Equipment
204,000
34,000
170,000
102,000
Asset 3: This machine was acquired by making a $34,000 down payment and issuing a $102,000,
2-year, zero-interest-bearing note. The note is to be paid off in two $51,000 installments made at
the end of the first and second years. It was estimated that the asset could have been purchased
outright for $122,060.
Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks
commercial substance.) Facts concerning the trade-in are as follows.
Cost of machinery traded
$340,000
Accumulated depreciation to date of sale
136,000
Fair value of machinery traded
272,000
Cash received
Fair value of machinery acquired
34,000
238,000
Asset 5: Equipment was acquired by issuing 100 shares of $27 par value common stock. The stock
had a market price of $37 per share.
Construction of Building: A building was constructed on land purchased last year at a cost of
$510,000. Construction began on February 1 and was completed on November 1. The payments
to the contractor were as follows.
Date
Payment
2/1
$408,000
6/1
1,224,000
9/1
1,632,000
11/1
340,000
To finance construction of the building, a $2,040,000, 12% construction loan was taken out on
February 1. The loan was repaid on November 1. The firm had $680,000 of other outstanding
debt during the year at a borrowing rate of 8%.
Record the acquisition of each of these assets. (Round intermediate calculations to 5 decimal
places, e.g. 1.25124 and final answer to 0 decimal places e.g. 58,971. Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is required,
select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
Acquisition of Assets 1 and 2
Machinery
255,000
Equipment
85,000
Cash
340,000
Acquisition of Asset 3
Machinery
122,060
Discount on N
13,940
Cash
34,000
Notes Payable
102,000
Acquisition of Asset 4
Machinery
178,500
Accumulated D
136,000
Cash
34,000
Machinery
340,000
Gain on Dispo
8,500
Acquisition of Asset 5
Equipment
3,700
Common Stock
2,700
Paid-in Capital
1,000
(To record acquisition of Office Equipment)
Land
510,000
Buildings
3,780,460
Cash
4,114,000
Interest Expen
176,460
PINA 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 $ 306,000
306/408
340,000
255,000
Equipment 102,000
102/408
340,000
85,000
$ 408,000
Acquisition of Asset 3
Use the cash price as a basis for recording the asset with a discount recorded on the note.
Discount on Notes Payable = ($136,000 – $122,060) = $13,940
Acquisition of Asset 4
Since the exchange lacks commercial substance, a gain will be recognized in the proportion of cash
received ($34,000/$272,000) times the $68,000 gain (FMV of $272,000 minus BV of $204,000).
The gain recognized will then be $8,500 with $59,500 of it being unrecognized and used to reduce
the basis of the asset acquired.
Machinery = ($238,000 – $59,500) = $178,500
Acquisition of Asset 5
In this case the Office Equipment should be placed on Pina’s books at the fair market value of the
stock. The difference between the stock’s par value and its fair market value should be credited to
Paid-in Capital in Excess of Par—Common Stock.
Equipment
= (100 × $37 per share) = $3,700
Common Stock = (100 shares × $27 par) = $2,700
Construction of Building
Schedule of Weighted-Average Accumulated Expenditures
Date
February 1
February 1
June 1
September 1
November 1
Amount
Current Year
Weighted-Average Accumulated
Capitalization Period
Expenditures
$510,000
408,000
1,224,000
1,632,000
340,000
$4,114,000
9/12
9/12
5/12
2/12
0/12
$382,500
306,000
510,000
272,000
0
$1,470,500
Note that the capitalization is only 9 months in this problem.
Avoidable Interest
Weighted-Average
Accumulated Expenditures
$1,470,500
Interest Rate
×
12%
Avoidable Interest
=
$176,460
The weighted expenditures are less than the amount of specific borrowing; the specific borrowing
rate is used.
Building Cost = ($3,604,000 + $176,460) = $3,780,460
Note to instructor: Total interest recorded / paid during the year on this borrowing would have
been $183,600 ($2,040,000 X 12% X 9/12). The entry to record the capitalized interest will
reverse the interest expense by $176,460, such that there will be interest expense on that borrowing
of $7,140 ($183,600 - $176,460) recorded during the year.
Exercise 10-23
Plant assets often require expenditures subsequent to acquisition. It is important that they be
accounted for properly. Any errors will affect both the balance sheets and income statements for a
number of years.
For each of the following items, indicate whether the expenditure should be capitalized or
expensed in the period incurred.
Items
(a) Improvement.
Capitalized
(b) Replacement of a minor broken part on a machine.
Expensed
(c) Expenditure that increases the useful life of an existing asset.
Capitalized
(d) Expenditure that increases the efficiency and effectiveness of a productive
asset but does not increase its salvage value.
Capitalized
(e) Expenditure that increases the efficiency and effectiveness of a productive
asset and increases the asset’s salvage value.
Capitalized
(f) Expenditure that increases the quality of the output of the productive asset.
Capitalized
(g) Improvement to a machine that increased its fair market value and its
production capacity by 30% without extending the machine’s useful life.
Capitalized
(h) Ordinary repairs.
Expensed
Exercise 10-24
On December 31, 2017, Pina Inc. has a machine with a book value of $1,353,600. The original
cost and related accumulated depreciation at this date are as follows.
Machine
Less: Accumulated depreciation
Book value
$1,872,000
518,400
$1,353,600
Depreciation is computed at $86,400 per year on a straight-line basis.
Presented below is a set of independent situations. For each independent situation, indicate the
journal entry to be made to record the transaction. Make sure that depreciation entries are made
to update the book value of the machine prior to its disposal.
A fire completely destroys the machine on August 31, 2018. An insurance settlement of
$619,200 was received for this casualty. Assume the settlement was received immediately. (Credit
account titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
Account Titles and Explanation
August 31, 2018
Depreciation E
Debit
Credit
57,600
Accumulated D
57,600
(To record current depreciation.)
August 31, 2018
Loss on Dispo
676,800
Cash
619,200
Accumulated D
576,000
Machinery
1,872,000
(To record loss of the machine.)
Depreciation Expense
= (8/12 × $86,400)
= $57,600
Loss on Disposal of Machinery
= ($1,872,000 – $576,000) – $619,200 = $676,800
Accumulated Depreciation—Machinery = ($518,400 + $57,600)
= $576,000
On April 1, 2018, Pina sold the machine for $1,497,600 to Dwight Yoakam Company. (Credit
account titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
April 1, 2018
Account Titles and Explanation
Depreciation E
Debit
21,600
Accumulated D
21,600
(To record current depreciation.)
April 1, 2018
Credit
Cash
1,497,600
Accumulated D
540,000
Machinery
1,872,000
Gain on Dispo
165,600
(To record sale of the machine.)
Depreciation Expense
= (3/12 × $86,400)
= $21,600
Accumulated Depreciation—Machinery = ($518,400 + $21,600)
= $540,000
Gain on Disposal of Machinery
= [$1,497,600 – ($1,872,000 – $540,000)] = $165,600
On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair
value of the machine at the time of the donation was estimated to be $1,584,000. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
July 31, 2018
Account Titles and Explanation
Depreciation E
Debit
Credit
50,400
Accumulated D
50,400
(To record current depreciation.)
July 31, 2018
Contribution Ex
1,584,000
Accumulated D
568,800
Machinery
1,872,000
Gain on Dispo
280,800
(To record donation of the machine.)
Depreciation Expense
= (7/12 × $86,400)
= $50,400
Accumulated Depreciation—Machinery = ($518,400 + $50,400)
= $568,800
Gain on Disposal of Machinery
= [$1,584,000 – ($1,872,000 - $568,800)] = $280,800