CHAPTER 9
PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION AND DISPOSAL
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number
Content
Time Range
(minutes)
E9-1
Determination of Cost. Analysis of numerous items
to determine whether or not to include in property,
plant, and equipment.
5-10
E9-2
Property, Plant, and Equipment. Analysis of various
items for potential balance sheet inclusion.
5-10
E9-3Acquisition Costs. Compute total acquisition costs
5-10
of machine and prepare journal entry to record.
E9-4
Acquisition Cost. Journal entry to record acquisition.
Analysis of entry if price not available.
5-15
E9-5
(AICPA adapted). Acquisition Cost. Determination
of cost and journal entry to record acquisition.
5-15
E9-6
(AICPA adapted). Acquisition of Land and Building.
Computation of land and new building cost.
10-15
E9-7
Lump Sum Purchase. Cost assigned to land, buildings,
and equipment.
10-15
E9-8
Exchange of Assets. No boot, similar productive
assets. Journal entries.
10-15
E9-9
Exchange of Assets. Boot, similar productive assets,
loss. Journal entries.
10-15
E9-10
Exchange of Assets. Boot, similar productive assets,
gain. Journal entries.
10-15
E9-11
Exchange of Assets. No boot, dissimilar productive
assets. Journal entries.
10-15
E9-12
Exchange of Assets. Boot, dissimilar productive
assets. Journal entries.
10-15
E9-13
(AICPA adapted). Exchange of Assets. No boot,
similar productive assets. Determination of
5-10
9-1
amount to be shown in the accounting records.
Number
Content
Time Range
(minutes)
E9-14
Self-Construction. Determination of amount to be
capitalized. Evaluation under differing outside
contractor's bids.
10-15
E9-15
Donation. Journal entry to record acquisition.
Financial statement disclosure. Time differences
for passage of title.
10-20
E9-16
Interest During Construction. Compilation of amount
to be capitalized. Financial statement disclosure.
5-15
E9-17
Interest During Construction. Compute amount of
capitalized interest and interest revenue.
5-15
E9-18
Expenditures. Capital vs. operating. Classification
of various items.
5-10
E9-19
(Appendix). Oil and Gas Accounting. Successful
efforts, full-cost methods. Determination of
expense and balance sheet value.
10-20
P9-1
Acquisition Costs. Reclassification of erroneously
recorded items. Journal entries.
20-30
P9-2
Costs Subsequent to Acquisition. Adjusting entries
to correct the books from improperly recorded costs.
Acquisition, legal fees, insurance, additions, repairs.
45-60
P9-3
Cost Classification. Journal entries to record
various transactions. Acquisition, parking lot,
sale, lease, freight, installation, taxes.
25-35
P9-4
(CMA adapted). Self-Construction. Computation
according to GAAP of amount to be capitalized.
Identification of any alternative procedures.
30-45
P9-5
Acquisition Cost. Acquisition, replacement, 20-30
purchase. Journal entries to record various
transactions.
P9-6
(AICPA adapted). Comprehensive: Analysis of
Changes in Fixed Assets. Preparation of schedules
for changes in land, building, leasehold improvements,
and machinery and equipment.
25-35
P9-7
Assets Acquired by Exchange. Various situations
dealing with similar or dissimilar productive
assets and boot. Journal entries.
40-60
9-2
Number
Content
Time Range
(minutes)
P9-8
Assets Acquired by Exchange. Various situations
dealing with similar or dissimilar productive assets,
boot, and changing fair value. Journal entries.
30-45
P9-9
Interest During Construction. Computation of amount
to be capitalized and amount to be depreciated.
Straight-line. Effects on financial statements.
20-30
P9-10
Comprehensive: Interest Capitalization. Computation
of amounts of capitalized interest, interest expense,
and interest revenue. Journal entries to record
construction costs, including interest.
40-60
P9-11
Events Subsequent to Acquisition. Replacement,
repairs, demolition. Journal entries to record
various transactions.
20-30
P9-12
(AICPA adapted). Comprehensive: Adjusting Entries.
Analysis of machinery and equipment account. Schedules
to show effect of additions and retirements on
account balances. Journal entries.
40-60
P9-13
(AICPA adapted). Adjusting Entries. Analysis of
the building account. Journal entries to adjust
the account as necessary. Supporting computations.
40-60
P9-14(Appendix). Oil and Gas Accounting. Successful
10-20
efforts, full-cost methods. Financial statement
disclosure.
ANSWERS TO QUESTIONS
Q9-1For a company to include an asset in the category of property, plant, and equipment, the asset must: (1) be held for use in the
normal course of business; (2) have an expected useful life of more than one year; and (3) be tangible property - that
is, the asset must have physical substance.
Q9-2Generally, a company capitalizes the expenditures that are necessary to obtain the benefits to be derived from the asset and
includes them as a cost of property, plant, and equipment. The expenditures include the costs incurred in the
acquisition of an asset and in putting the asset into operating condition. The company expenses the costs of
maintaining the benefits at the levels originally expected.
Q9-3A company classifies land held for investment on the balance sheet as an investment. It does not include the land as property,
plant, and equipment, since it is not being used in the normal course of business in a productive capacity.
9-3
Q9-4The book value of an asset is the recorded acquisition cost less the accumulated depreciation recorded to date.
Q9-5At the date of acquisition, the acquisition cost is equal to the market value. At the end of the life of the asset, the book value
should equal the residual value (a market value). During the life of the asset, there is no defined relationship between
the book value and market value because depreciation is a process of cost allocation, not of market valuation.
Q9-6In a lump-sum purchase, the company allocates the total purchase price to the individual assets on the basis of their relative fair
values. This allocation is necessary because some of the assets may have different economic lives, may not be
depreciable, or may be depreciated by different methods.
Q9-7When a company exchanges securities for an asset, the acquisition cost of that asset is either the fair value of the securities
given up or the fair value of the asset acquired. The company makes the choice on the basis of the market that is
more reliable. If neither of these amounts is known, it may use an appraisal of the asset, or, as a final solution, the
company's board of directors may place a value on the transaction.
Q9-8The distinction between similar and dissimilar productive assets is that similar productive assets are of the same general type
and perform the same basic function and are used in the same line of business. This distinction is made because, in
the exchange of similar productive assets, the earning process is not considered completed, and thus the accounting
for the transaction is different than when dissimilar productive assets are exchanged.
Q9-9When similar productive assets are exchanged, the company recognizes a gain to the extent that it receives "boot" along with
the asset. The company recognizes a loss in accordance with the conservatism principle of accounting.
When dissimilar productive assets are exchanged, the earning process is considered completed and the company recognizes both
gains and losses.
Q9-10The term "boot" refers to monetary consideration either paid or received. For the special rules to apply, the boot must be less
than 25% of the fair value of the transaction.
Q9-11The general principle underlying accounting for dissimilar productive assets is that the earning process has been completed
and thus gains or losses are recognized. On the other hand, in accounting for similar productive assets the earning
process has not been completed. The company is in the same relative position, so gains on the exchange is deferred
(except to the extent that boot is received). Losses are recognized in accordance with the conservatism principle.
Q9-12According to the provisions of FASB Statement No. 34, a company capitalizes interest on the acquisition of an asset if the asset
requires a period of time to get it ready for its intended use - a criterion that is met for the self-construction of an asset.
Specifically, the company does not capitalize interest for the following types of assets:
1.Inventories that are routinely manufactured or otherwise produced on a repetitive basis.
2.Assets that are in use or ready for their intended use.
3.Assets that are not being used in the earning activities of the company and are not undergoing the activities
necessary to get them ready for use.
Since imputed interest is not capitalized, the company must have borrowed funds to finance the self-construction of the asset.
In contrast, interest on a note payable (that is not associated with the construction of an asset) is expensed as incurred.
Q9-13A company bases the amount of interest capitalized for a self-constructed asset on the actual amounts borrowed and the cost
of those borrowings. The amount is intended to be that portion of the interest cost incurred during the asset's
construction period that theoretically could have been avoided. The company determines the amount that it
capitalizes by applying an interest rate to the average amount of the expenditures on the self-constructed asset
during the capitalization period.
9-4
Q9-14Since activities that are necessary to get the asset ready for its intended use are in progress, the asset qualifies for interest
capitalization. The company capitalizes interest to the building account unless it makes specific expenditures that
are normally added to the land account, as discussed at the beginning of this chapter.
Q9-15Three alternative treatments of fixed overhead costs are (1) to allocate a portion of the total fixed overhead to the cost of the
asset being constructed, (2) to include only the incremental fixed overhead that is attributable to construction in the
cost of the self-constructed asset, or (3) to include no fixed overhead in the cost of the self-constructed asset.
Proponents of the allocation of total overhead argue that construction should be treated the same as any other
production process that receives a portion of overhead costs. This method is appropriate when the company is
operating at full capacity and regular production is reduced by the self-construction. Arguments in favor of including
only the incremental increase are that normal production costs should include the same amount of overhead whether
construction is going on or not, the normal overhead would be incurred anyway, and that the cost of an asset and the
decision to construct it should be based on additional and incremental costs incurred. This method is appropriate
when the company is in an excess capacity situation. The argument in favor of including no fixed overhead is that the
fixed overhead does not change as a result of the construction. Therefore, to include some overhead would result in
less overhead being expensed in the current period, and an increase in income.
Q9-16Under generally accepted accounting principles, a company may not recognize profit on the self-construction of an asset. The
revenue recognition principle allows recognition of profit on asset use and disposal, not on the acquisition or
construction of an asset. If construction costs are materially greater than the fair value of the asset, then the
convention of conservatism requires the company to write-down the capitalized costs and recognize a loss.
Q9-17The distinction between a capital expenditure and an operating expenditure is whether the costs have increased the future
economic benefits of the asset above those that were originally expected. The future economic benefits can be
increased by extending the life of the asset, improving productivity, producing the same product at a lower cost, or
increasing the quality of the product. For example, if a machine receives a major overhaul that increases the benefits
to be realized from the asset, the costs are capitalized. Conversely, ordinary repairs are of a maintenance type that
do not increase the total benefits to be realized, and, therefore, are expensed. As another example, the cost of adding
a new wing to an existing hospital is capitalized since it increases the total benefits of the hospital, whereas repairing
the elevators does not increase the economic benefit of the hospital and so is expensed.
Q9-18An addition is a new asset that is being "added" or utilized in conjunction with an old asset. In contrast, an improvement/
replacement involves the substitution of a new part or asset for an old one. In accounting for an addition, a company
capitalizes the costs of the addition, and takes out of the old asset account any portion of the old asset that is
demolished or removed. A company capitalizes improvement and replacement costs using the substitution method
when it knows the book value of the asset being replaced, by replacing the old book value with the cost of the new
asset. If it does not know the old book value, then it still capitalizes the cost of the new asset, but with either a debit
to the Accumulated Depreciation account of the old asset or a debit to the old Asset account.
Q9-19The costs of ordinary repairs and maintenance are expenses incurred routinely to keep the asset in operating condition. Since
these costs do not increase the future benefits of the asset, a company expenses them as they are incurred. For
interim financial reporting, the use of an Allowance account is appropriate in order to even out the expenses.
However, this account is closed at the end of the year. Extraordinary repairs are those that cannot be foreseen and
do not occur in the usual course of operations, such as emergency repairs to a machine that breaks down during
production. Usually, a company expenses these costs, but care should be taken to note whether these repairs
increase the future benefits of the asset. If they do, then the company capitalizes the costs.
Q9-20Leasehold improvements are improvements made to leased property that, upon termination of the lease, will revert back to the
lessor. A company capitalizes the cost of these improvements and subsequently amortizes them over the economic
life of the improvements or the lease term, whichever is shorter.
Q9-21An Allowance for Repairs account appears only on balance sheets of interim financial statements if a company incurs repair
costs unevenly. At year-end, this account is closed; thus, it does not appear on a year-end balance sheet.
Q9-22A company accounts for the disposal of an asset by removing both the asset and accumulated depreciation to date from the
ledger, recording the receipt of cash, if any, and also recording any gain or loss. It reports this gain or loss in ordinary
income (in the category of Other Items) on the income statement unless it meets the criteria for an extraordinary item.
9-5
Q9-23Under the successful-efforts method of accounting for oil and gas properties, a company capitalizes only those costs incurred
in drilling for successful wells while it expenses the costs of unsuccessful wells. In contrast, under the full-costing
method a company capitalizes all costs of drilling wells, whether the drilling was successful or not.
ANSWERS TO CASES
C9-1 (AICPA adapted solution)
1.The expenditures that are capitalized when equipment is acquired for cash include the invoice price of the equipment (net of
discounts) plus all incidental outlays relating to its purchase or preparation for use, such as insurance during transit, freight,
duties, ownership search, ownership registration, installation, and breaking-in costs. Any available discounts, whether taken
or not, should be deducted from the capitalizable cost of the equipment.
2.a.When the market value of the equipment is not determinable by reference to a similar cash purchase, the capitalizable cost of
equipment purchased with bonds having an established market price is the market value of the bonds.
b.When the market value of the equipment is not determinable by reference to a similar cash purchase, and the common stock
used in the exchange does not have an established market price, the capitalizable cost of equipment is the equipment's
estimated fair value if that is more clearly evident that the fair value of the common stock. Independent appraisals may
be used to determine the fair values of the assets involved.
c.When the market value of equipment acquired is not determinable by reference to a similar cash purchase, the capitalizable
cost of equipment purchased by exchanging similar equipment having a determinable market value is the lower of the
recorded amount of the equipment relinquished or the market value of the equipment exchanged.
C9-1 (continued)
3.The factors that determine whether expenditures relating to property, plant, and equipment already in use are capitalized are as
follows:
•Expenditures are relatively large in amount.
•They are nonrecurring in nature.
•They extend the useful life of the property, plant, and equipment.
•They increase the usefulness of the property, plant, and equipment.
4.The net book value at the date of the sale (cost of the property, plant, and equipment less the accumulated depreciation) is removed
from the accounts. The excess of cash from the sale over the net book value removed is accounted for as a gain on the sale,
while the excess of net book value removed over cash from the sale is accounted for as a loss on the sale.
C9-2 (AICPA adapted solution)
1.Expenditures are capitalized when they benefit future periods. The cost to acquire the land is capitalized and classified as land, a
nondepreciable asset. Since tearing down the small factory is readying the land for its intended use, its cost is part of the cost
of the land and is capitalized and classified as land. As a result, this cost is not depreciated as it would be if it was classified
with the capitalizable cost of the building.
Since the rock blasting and removal is required for the specific purpose of erecting the building, its cost is part of the cost of the
building and is capitalized and classified with the capitalizable cost of the building. This cost is depreciated over the
estimated useful life of the building.
9-6
The road is a land improvement, and its cost is capitalized and classified separately as a land improvement. This cost is depreciated
over its estimated useful life.
The added four stories is an addition, and its cost is capitalized and classified with the capitalizable cost of the building. This cost is
depreciated over the remaining life of the original office building because that life is shorter than the estimated useful life of
the addition.
2.The gain is recognized on the sale of the land and building because income is realized whenever the earning process is complete
and the sale takes place.
The book value at the date of the sale is composed of the capitalized cost of the land, the land improvement, and the building, as
determined above, less the accumulated depreciation on the land improvement and the building. The excess of the proceeds
received from the sale over the net book value at the date of sale is accounted for as part of income from continuing operations
in the income statement.
C9-3 (AICPA adapted solution)
1.The capitalizable cost includes all costs relating to purchase or preparation for use. Such cost may include delivery and installation.
The capitalizable cost represents the cash equivalent price and accordingly would not include interest charges.
2.Normal maintenance performed on the new machine should not be capitalized as part of the machine's cost. It should be expensed
as incurred if the machine is not used in the manufacturing process or should be inventoried as part of factory overhead if the
machine is used in the manufacturing process. Normal maintenance does not enhance the service potential of the machine.
3.The wing added to the manufacturing building should be capitalized. The addition should be depreciated over its estimated useful
life or the remaining useful life of the building of which it is an integral part, whichever is shorter. The addition should be
included in the property, plant, and equipment section of the balance sheet.
4.The leasehold improvements made to the office space should be capitalized. The leasehold improvements should be depreciated
(amortized) over their estimated useful lives or the term of the lease, whichever is shorter. The unamortized portion of the
leasehold improvements could be included as a separate caption in the property, plant, and equipment section or the
intangible assets section of the balance sheet. The amortized portion of the leasehold improvements would be shown as an
expense in the income statement.
C9-4 (AICPA adapted solution)
1.The following costs, if applicable, should be capitalized as a cost of land:
(a)Negotiated purchase price
(b)Brokers' commission
(c)Legal fees
(d)Title fee
(e)Recording fee
(f)Escrow fees
(g)Surveying fees
(h)Existing unpaid taxes, interest, or liens assumed by the buyer
(i)Clearing, grading, landscaping, and subdividing
(j)Cost of removing old building (less salvage)
(k)Special assessments such as lighting or sewers if they are permanent
in nature.
9-7
C9-4 (continued)
2.A plant asset acquired on a deferred-payment plan should be recorded at an equivalent cash price excluding interest. If interest is
not stated in the sales contract, an imputed interest should be determined. The asset should then be recorded at its present
value, which is computed by discounting the payments at the stated or imputed interest rate. The interest portion (stated or
imputed) of the contract price should be charged to interest expense over the life of the contract.
3.In general, plant assets should be recorded at the fair value of the consideration given or the fair value of the asset received,
whichever is more clearly evident. This general theoretical preference is somewhat constrained by the requirements of APB
Opinion No. 29.
Specifically when exchanging an old machine and paying cash for a new machine, the new machine should be recorded at the
amount of monetary consideration (cash) paid plus the undepreciated cost of the nonmonetary asset (old machine)
surrendered if there is no indicated loss. An indicated loss should be recognized; this would reduce the recorded amount of
the new machine. No indicated gain, however, should be recognized by the party paying monetary consideration.
C9-5 (AICPA adapted solution)
1.Capital expenditures benefit future periods. Revenue (operating) expenditures benefit the current period only.
2.a.The purchase price of the land should be capitalized. The land should be shown as a noncurrent asset on the balance sheet at its
original cost and it is not subject to depreciation.
b.The cost of constructing the factory should be capitalized and depreciated over the expected life of the factory. The
depreciation should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as
cost of sales as goods are sold. The factory expenditures, net of accumulated depreciation, should be shown as a
noncurrent asset on the balance sheet. Inventory should be reported as a current asset on the balance sheet, and cost
of sales should be reported as an expense on the income statement.
c.The cost of grading and paving the parking lot should be capitalized and depreciated over the expected life of either the
factory or parking lot, whichever is shorter. The depreciation should be added to cost of inventory, via factory overhead,
as goods are produced, and is expensed as cost of sales as goods are sold. The land improvement expenditures, net
of accumulated depreciation, should be shown as a noncurrent asset on the balance sheet. Inventory should be
reported as a current asset on the balance sheet, and cost of sales should be reported as an expense on the income
statement.
C9-5 (continued)
2. (continued)
d.The cost of maintaining the factory once production has begun is a "revenue type" expenditure. However, since it is a
factory cost, it should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as
cost of sales as goods are sold. Inventory should be reported as a current asset on the balance sheet, and cost of sales
should be reported as an expense on the income statement.
C9-6
1.a.It is clear that considerable value attaches to the television rights. A conservative approach to the valuation is to compute the
present value of the cash flows expected under the currently existing television contract. However, since it can be
expected that a new television contract will be signed to replace the existing contract, probably at different rates, it could
be argued that a longer time period should be considered. Certainly a buyer would be including a longer time period in
the estimation of the future cash flows expected if the franchise is purchased.
b.The value assigned to the television rights is considered depreciable because the service provided by the franchise (that is,
playing the games) is partially used up each season. The depreciation is over the period used in determining the value
9-8
of the television rights. The argument against depreciating the value of the television rights would be that the televising
of football games can be expected to continue indefinitely in the future, and, therefore, the value does not decline.
c.The purchase price assignable to player contracts is the present value of the benefits generated by the player less the
salaries payable under current contracts. This is a subjective valuation that would be very difficult to determine in
practice.
d.The value assigned to the player contracts is depreciated over the estimated playing career or the contract period,
whichever is shorter.
e.The value of the franchise is the present value of the future cash flows, after tax, generated by the franchise. Thus, it
includes the expected cash inflow from television rights, ticket sales, etc., less the expected cash outflow for players'
contracts, franchise operations, etc. Presumably, this is believed by the buyer to be greater than $8.5 million.
C9-6 (continued)
2.Students may raise ethical issues, such as:
a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.
b.The allocation of cost to each depreciable asset and the selection of the estimated useful life, and the effects of those
choices on net income.
c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
compute taxable income.
C9-7
1.There is no doubt that the first 2,000 acres qualifies for interest capitalization because it meets the various criteria of FASB
Statement No. 34. It meets the criteria of a qualifying asset and the three criteria for the start of the capitalization period expenditures have been made, activities are in progress, and interest cost is being incurred.
The remaining 3,000 acres of the initial 5,000 acres also qualify for interest capitalization. FASB Statement No. 34 specifies that the
term "activities" is to be construed broadly and should include more than physical construction. Since the 5,000 acres were
acquired for a single development, "activities" are in progress on the entire 5,000 acres.
It is less definite whether the adjacent parcel of land qualifies for interest capitalization. The decision will probably be determined by
how the company has developed its plans. If the plans indicate that the entire project is a single integrated development on
which design work has been performed and permits obtained, then the adjacent parcel of land would also qualify for interest
capitalization. On the other hand, if the company's plans indicate that the additional acreage was acquired for speculative
reasons and the design work and permits do not include this additional acreage, then the adjacent parcel of land does not
qualify for interest capitalization.
The development also qualifies for interest capitalization because it meets the criteria of FASB Statement No. 34.
2.The company could commence activities on all the land, by starting such activities as planning the future expansion. Since FASB
Statement No. 34 states that the term activities is to be construed broadly, such actions would allow the company to compute
the interest capitalized on the amounts borrowed to acquire all the land. This would increase the interest capitalized and the
asset value, thereby reducing interest expense and increasing net income.
9-9
C9-8
Capitalize at $100,000: The option costs are not applicable to the purchase price and are, therefore, not a cost of the land. Rather,
they are an expense incurred during the year required to make a decision and should not be capitalized. The option was for
a period of one year and thus its usefulness has expired and should not be capitalized.
Capitalize at $105,000: Because the option cost of $5,000 was necessary in order to purchase the desired site, this amount should be
capitalized along with the contract price of $100,000. The option for the site not chosen has no usefulness once the other site
was purchased and should be expensed.
Capitalize at $110,000: In order for the company to make the best choice as to sites, it was necessary to acquire both options.
Therefore, regardless of which site was chosen, the total cost of both options should be capitalized along with the contract
price.
C9-9
According to APB Opinion No. 29, donated assets are recorded at their fair value. The controller's argument of no payment by the
company is what makes the acquisition a nonreciprocal transfer and thus governed by APB No. 29. This procedure also
makes the recording of the asset consistent with the treatment of other assets that are recorded at their fair value at the date
of acquisition.
The alteration costs of $15,000 are necessary in order for the company to put the building into operating condition. These are
considered a cost of the building and are capitalized. The possibility of the building being returned to the city is not relevant
to the capitalization of these costs, unless the return is considered probable under the terms of FASB Statement No. 5. The
argument that exclusion of the $15,000 will closer approximate the market value of the building is invalid. There is no
relationship between an asset's recorded value and its fair value, except by coincidence. The issue of reducing income taxes
is also not relevant to financial reporting.
C9-10 (AICPA adapted solution)
1.The valuation of assets that are acquired by a corporation in exchange for its own common stock is sometimes difficult because of:
a.The absence of a readily determinable fair value for the assets acquired because they are not traded actively.
b.The absence of a readily determinable fair value for the securities given in exchange, either because they are not traded
actively or because the proportion of the number of shares in this single issue to all shares being traded is large enough
to affect the market price substantially.
c.The absence of arm's length or independent bargaining leading to the exchange.
C9-10 (continued)
1. (continued)
d.Widely varying estimates of the value of the asset acquired because of its nature (for example, unexplored or unproved
mineral deposits, manufacturing rights and patents).
e.The common presumption that when capital stock has a par or stated value it imputes a value to the assets for which it is
exchanged.
2.a.The directors of Brahe Corporation appraised the leases at $600,000 and the transaction involving the stock issuance to Messrs.
Moses and Price supports that appraisal. In the exchange transaction, a price of $6 per share was imputed to the Brahe
Corporation common stock when 75,000 shares were given to Messrs. Moses and Price ($6 x 75,000 = $450,000) in
exchange for assets worth $200,000 and options which, based on the appraisal of the directors, were worth $250,000.
This transaction was followed by a public sale of 180,000 shares of Brahe Corporation common stock at $6 per share,
the same price that was imputed to the stock earlier when Messrs. Moses and Price obtained 75,000 shares in
connection with the exchange. The fact that the public was willing to purchase, and did purchase, substantial shares at
9-10
the same price would indicate that the appraisal value of leases recorded on the books is a reasonable one.
Furthermore, the law allows boards of directors broad discretion in establishing values, provided there is no fraud.
b.Brahe Corporation might have taken additional steps to demonstrate the reasonableness of the $600,000 appraisal of leases
so that more information would be available if questions were raised about their possible overvaluation. Because the
appraisal was based solely upon the lease price of certain other acreage in the area, it would have been wise to obtain
supplementary appraisals by independent competent technicians to support the value. This is particularly true because
the board was not independent, having been elected by Messrs. Moses and Price, who were the sole stockholders, and
also the parties who were offering the options to Brahe Corporation. In addition, Brahe Corporation could have
compiled data to substantiate beyond doubt the reasons why an acceptable bargain purchase did exist here in
permitting the purchase with options for only $350,000 of leases worth the substantially higher amount of $600,000.
3.Based on available information, Brahe Corporation should charge 1/10 of the value of the leases against income at December 31,
2001, in accordance with generally accepted accounting principles. However, this should not be done if (a) the total lease
acreage can be regarded as a unitary whole, or (b) the investment was made with anticipation that some portion of the total
acreage obtained would prove worthless.
C9-11
Note to Instructor: This case does not have a definitive answer. From a financial reporting perspective, GAAP is identified and
summarized. From an ethical perspective, various issues are raised for discussion purposes.
From a financial reporting perspective, there are 3 issues. The first issue relates to when interest capitalization begins. Under GAAP,
it begins when (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. Assuming that the company has debt and that the
architect has been paid (often a retainer is paid), then the three conditions probably were met in 1999. A second issue is the
costs that can be included. The expenditures on which interest is capitalized are the cumulative capitalized expenditures on
the project. This would allow including 1/12 of the accountant's salary and similar expenditures, although it would be
necessary to have documentation that such costs were directly related to the project. The third issue is how to report the
interest cost if there was no capitalization in 1999. If interest was not capitalized, then this is an error because there was a
misapplication of accounting principles. The error would be accounted for as a prior period adjustment. So the CEO has to
accept the "good" of maximizing the interest capitalization in 2000 and the "bad" of admitting to an error in applying
accounting principles (even though income in 1999 will be increased by the error correction). Of course, the suggestion of
including 1999's interest capitalization in 2000 is not appropriate.
From an ethical perspective, the issue is whether it is appropriate to "dump" costs into the project so that the costs are maximized,
interest capitalized is maximized, interest expense and other expenses are minimized, and net income is maximized. The
primary stakeholders are the company's current and potential stockholders and creditors. Accounting principles allow for
judgment on these issues and expect that professional judgment be exercised. On the other hand, if the net income amount
is not grounded in economic reality, current and potential stockholders may be misled about the value of an investment in the
company. Also, the CEO should be reminded that the higher cost of the building will result in higher depreciation expense,
although that long-term perspective may be of no concern.
9-11
C9-12
Note to Instructor: Students are expected to cite paragraphs from the FASB Original Pronouncements in their research of this issue.
Since the Statements of Concepts are not included in the FASB Current Text, reference is made to Intermediate Accounting. Also,
the issues in this case are addressed by the FASB Emerging Issues Task Force Issue No. 89-13 which is included in a separate
published volume.
1.
To:President, Tenth National Bank
From:Student
I have researched the issue of how to account for the costs of removing the asbestos from the two buildings. According to the FASB
Original Pronouncements, Concepts Statement No. 6, par. 25 and 26 (Intermediate Accounting, p. 58) assets are probable
future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Also, an asset
involves a capacity to contribute directly or indirectly to future cash flows.
First, I will deal with the office building that was purchased with a known asbestos problem. The $2 million cost of removing the
asbestos may be considered to be a cost that was necessary to prepare the building for its intended use. It may also be
argued that the cost of $2 million indirectly contributes to the future cash inflows because without the cost the building could
not be used. Both these arguments assume that the selling price was reduced because of the known estimated costs of
removing the asbestos. Based on these issues, I recommend that the $2 million be capitalized to the cost of the building.
Note that a counter argument is that the $2 million is a "maintenance" cost that does not extend the useful life or improve the physical
structure beyond the state in which it was originally intended to be used. Under this argument, the cost would be expensed.
The second issue is the shopping mall in which the asbestos problem was not known at the time the building was acquired. The
following alternatives may be considered:
a.Expense the $1 million because it is a "maintenance" cost that does not extend the useful life or improve the property
beyond its original state. Instead the cost returns the building to its normal state of repair. Also, it may be argued that
the "extra" cost does not benefit future periods.
b.Capitalize the $1 million for the reasons outlined earlier for the office building. Also, it may be argued that incurring the
costs has extended the life of the mall because without the costs the life would be very short. However, these arguments
assume that the mall can be sold at a profit; that is, the $1 million can be recovered through a sale. If a loss is expected,
the cost must be expensed.
c.Capitalize the portion of the $1 million that relates to "normal" replacement of the affected portions of the building and
expense any "special" costs incurred because of the asbestos problem.
C9-12 (continued)
1. (continued)
I recommend that the $1 million be expensed (unless it can be demonstrated that the amount will be recovered through a sale which
seems unlikely since the building was obtained through a foreclosure).
Another issue is how to classify the expense. Three alternatives are:
a.Report as an extraordinary item because it is considered to be unusual and infrequent (FASB Current Text, par. I17.401 or
FASB Original Pronouncements, APB 30, par. 20). This alternative is difficult to justify because of the numerous
asbestos problems affecting large numbers of buildings.
b.Report as an unusual or infrequent item that is disclosed as a separate line item in the income statement. This alternative is
easier to justify because asbestos problems have occurred infrequently for this bank.
9-12
c.Report as an operating expense with no special disclosure in the income statement.
I recommend that the $1 million be classified as an operating expense with no special disclosure in the income statement because
asbestos problems have become so widespread and banks frequently repossess buildings, thereby making the cost neither
unusual nor infrequent. However, disclosure in the notes to the financial statements may be appropriate.
Note that this recommendation does not consider the value at which the repossessed shopping mall is carried. AICPA Statement of
Position No. 92-3 states that foreclosed assets held for sale are carried at the lower of the cost or fair value, less estimated
costs to sell.
2.Students may raise ethical issues, such as:
a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.
b.The disclosure responsibilities of sellers.
c.The liability exposure of professionals who provide estimates of future costs.
C9-13
Note to Instructor: Students are expected to cite paragraphs from the FASB Current Text or FASB Original Pronouncements in their
research of this issue.
1.
To:President, Perry Park Company
From:Student
I have researched the various issues involved in the exchange of the shares for the land and building. I will address each of the major
issues you raised:
a.Does the transaction qualify as a nonmonetary exchange? Since no cash was exchanged, it is a nonmonetary exchange.
However, according to the FASB Current Text, par. N35.407 (FASB Original Pronouncements, APB 29, par. 3e), similar
productive assets are of the same general type, that perform the same function, or that are employed in the same line of
business. Clearly the exchange of shares for land and a building does not meet this criterion. Therefore, the exchange
is of dissimilar productive assets and the transaction must be recorded at fair value.
b.What is the value to place on the transaction and its components? According to the FASB Current Text, par. N35.105 (FASB
Original Pronouncements, APB 29, par. 18), either the value of the shares or the value of the land and building may be
used, but the most reliable value should be used. If both values are equally unreliable, it is preferable to use the value
of the assets because it is independent of the value of the shares. A final alternative is to have the Board of Directors
place a value on the transaction.
2.Students may raise ethical issues, such as:
a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.
b.The value assigned by each entity will affect net income, and perhaps management compensation such as bonuses.
c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
compute taxable income.
ANSWERS TO MULTIPLE CHOICE
9-13
1. c
2. b
3. b
4. d
5. b
6. c
7. d
8. b
9-14
9. c
10. c
9-15
SOLUTIONS TO EXERCISES
E9-1
The following are included in the cost:
1.Contract price
3.Freight costs
6.Installation costs
7.Testing costs
8.Overhaul costs before use
9.Costs of grading land prior to construction
10.Tax assessment for street improvements
11.Delinquent property taxes on property acquired
13.Cost of insurance during construction (could be expensed)
15.Interest costs during construction (not imputed interest)
16.Landscaping costs
18.Cost of tearing down a building on newly acquired land
19.Replacement of an electric motor in a machine (if benefits are increased)
20.Expansion of the heating/cooling system
The following are not included in the cost:
2.List price
4.Discounts taken (unless equal to discounts available, which are not included in the cost)
5.Discounts not taken
12.Cost of tearing down an old building (already owned)
14.Excess of costs over revenue during development stage
17.Severance pay for employees dismissed because of acquisition
21.Service contract for 2 years on the acquired asset
22.Cost of training new employees
E9-2
The following are included in property, plant, and equipment:
6.Fully depreciated assets still being used
7.Leasehold improvements
The following are not included in property, plant, and equipment:
1.Idle equipment awaiting sale
2.Land held for future use as a plant site
3.Land held for investment
4.Deposits on machinery not yet received
5.Progress payments on building being constructed
8.Assets leased to others
9-17
E9-3
Machine
Repair Expense
Cash
213,000*
1,000
214,000
*$200,000 - ($200,000 x 0.02) + $5,000 + $10,000 + $2,000
E9-4
1.The fair value of the asset is considered to be the cash price of $210,000 and thus the machine is recorded
at this fair value. Since a $50,000 down payment is made, the remaining $160,000 has to be allocated
between the note and the preferred stock. In most situations, it would be considered that the 10% fair
value of the note should take precedence over the agreed value of the preferred stock.
Present value of note: Four annual payments of
Present value factor n=4, i=10%
$95,095.95
$30,000
3.169865*
*Factor from Table 4 of Appendix D
Machinery
Discount on Notes Payable ($120,000 - $95,095.95)
Notes Payable
Preferred Stock, $100 par ($100 x 600)
Additional Paid-in Capital on Preferred Stock
Cash
210,000.00
24,904.05
120,000.00
60,000.00
4,904.05
50,000.00
Alternatively, if preference was given to the agreed value of the preferred stock, the journal entry to record the
acquisition would be
Machinery
Discount on Notes Payable
Notes Payable
Preferred Stock, $100 par
Cash
210,000
20,000
120,000
60,000
50,000
2.If the $210,000 cash price were not known, the fair value of the note and the agreed value of the preferred
stock would be used.
Machinery [($120,000 - $24,904.05) +
$50,000 + $60,000]
Discount on Notes Payable
Notes Payable
Preferred Stock, $100 par
Cash
205,095.95
24,904.05
120,000
60,000
50,000
9-18
E9-5 (AICPA adapted solution)
Cash equivalent price
Installation costs
Capitalized cost
$9,500
300
$9,800
Machinery
Discount on Notes Payable
Cash
Notes Payable
9,800
1,500
1,300
10,000
The asset should be recorded at its cash equivalent price of $9,500 plus installation costs of $300. This forces
a discount to be reported on the note payable, and interest to be recognized even though recognition of
interest on a note of less than one year is not required by APB Opinion No. 21.
E9-6 (AICPA adapted solution)
Land:
Purchase price
Demolition of old building
Legal fees
Salvaged materials
$50,000
4,000
2,000
(3,000)
$53,000
Building:
Architect's fees
Construction costs
$ 20,000
500,000
$520,000
E9-7
Acquisition cost
Appraisal
Total cost
$200,000
20,000
$220,000
Appraisal
Values % of Total
Land
Building
Equipment
Total value
125,000
Cost assigned to:
Land
40% x $220,000 = $ 88,000
Building 50% x $220,000 = $110,000
Equipment 10% x $220,000 = $ 22,000
Total cost assigned
$220,000
9-19
$100,000
50%
25,000
$250,000
40%
10%
100%
E9-8
Denver Company
Building: Warehouse (new)
Accumulated Depreciation: Building
Loss
Building: Warehouse (old)
30,000b
50,000
10,000a
90,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $30,000 - $40,000
bCost
= Fair value of asset surrendered
Bristol Company
Building: Warehouse (new)
Accumulated Depreciation: Building
Building: Warehouse (old)
aGain
25,000a
10,000
35,000
is not recognized (since no boot is received)
Cost = BV of asset surrendered
Note: Denver Company's journal entry is consistent with alternative 1 in Exhibit 9-2. Bristol Company's
journal entry is consistent with alternative 2 in Exhibit 9-2.
E9-9
Denver Company
Building: Warehouse (new)
Accumulated Depreciation: Building
Loss
Building: Warehouse (old)
Cash
30,000b
50,000
12,000a
90,000
2,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $28,000 - $40,000
bCost
= FV of asset surrendered + Boot paid = $28,000 + $2,000
9-20
E9-9 (continued)
Bristol Company
Cash
Building: Warehouse (new)
Accumulated Depreciation: Building
Gain
Building: Warehouse (old)
aTotal
35,000
gain = FV of asset surrendered - BV of asset surrendered
$5,000 =
$30,000
Gain recognized =
Boot
Boot + Fair value
of asset received
bCost
2,000
23,333b
10,000
333a
-
$25,000
x (FV-BV) = $2,000 x $5,000=$333
($2,000+$28,000) (rounded)
= BV + Gain recognized - Boot received = $25,000 + $333 - $2,000
Note: Denver Company's journal entry is consistent with alternative 3 in Exhibit 9-2. Bristol Company's
journal entry is consistent with alternative 6 in Exhibit 9-2.
E9-10
Denver Company
Building: Warehouse (new)
Accumulated Depreciation: Building
Loss
Cash
Building: Warehouse (old)
30,000b
50,000
7,000a
3,000
90,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $33,000 - $40,000
bCost
= FV of asset surrendered - Boot received = $33,000 - $3,000
Bristol Company
Building: Warehouse (new)
Accumulated Depreciation: Building
Building: Warehouse (old)
Cash
28,000b
10,000
35,000
3,000
aGain
is not recognized (since no boot was received)
bCost
= BV of asset surrendered + Boot paid = $25,000 + $3,000
Note: Denver Company's journal entry is consistent with alternative 5 in Exhibit 9-2. Bristol Company's
journal entry is consistent with alternative 4 in Exhibit 9-2.
9-21
E9-11
The exchange is of dissimilar productive assets.
Leonard Company
Truck
Accumulated Depreciation: Machine
Gain
Machine
9,000
24,000
3,000a
30,000
aGain
= FV of asset surrendered - BV of asset surrendered
= $9,000 - $6,000
Wilson Company
Machine
Accumulated Depreciation: Truck
Gain
Truck
9,000
4,000
1,000a
12,000
aGain
= FV of asset surrendered - BV of asset surrendered
= $9,000 - $8,000
E9-12
The exchange is of dissimilar productive assets.
Leonard Company
Truck
Accumulated Depreciation: Machine
Gain
Machine
Cash
9,000
24,000
2,500a
6,000
500
aGain
= FV of asset surrendered - BV of asset surrendered
= $8,500 - $6,000
Wilson Company
Machine
Cash
Accumulated Depreciation: Truck
Truck
Gain
8,500
500
4,000
12,000
1,000a
aGain
= FV of asset surrendered - BV of asset surrendered
= $9,000 - $8,000
9-22
E9-13 (AICPA adapted solution)
The exchange is of similar productive assets and, therefore, is recorded at cost and not fair value. Minor will
value Smith's contract at $145,000. Better will value Doe's contract at $140,000.
E9-14
Note: The exercise makes no mention of the capacity at which the company is operating.
1.If the company is operating at full capacity so that the construction causes less regular production to take
place, the cost of the constructed asset should be as follows:
Materials and supplies
Direct labor
Overhead (50% of direct labor)
Supervisor's overtime
$20,000
45,000
22,500
5,000
$92,500
Under this alternative, the construction is accounted for in the same way as regular products. The overtime
might be excluded if it has been included in the overhead rate. An unfavorable variance might be
charged to the construction.
If the company is operating with excess capacity, the cost of the constructed asset should be as follows:
Materials and supplies
Direct labor
Overtime - supervisor
$20,000
45,000
5,000
$70,000
Since regular production continues, none of the fixed overhead is allocated to the construction project, so
that the unit cost of the regular products is not reduced. This alternative recognizes that the cost of the
asset is the additional cost incurred to produce it and that the overhead would be incurred whether or
not the construction takes place.
Note that these two solutions are the logically desirable results under the conditions described, but there is
no requirement that companies actually use the alternative in these particular circumstances.
2.If the bid from the outside contractors was $80,000, it is questionable whether the use of the full overhead
rate is appropriate. The incremental approach seems more reasonable in this situation.
If the bid was $60,000, the Harshman Company has clearly incurred excessive costs to construct the building.
The building should be recorded at $60,000 and the excess costs should be recorded as a loss on
construction.
9-23
E9-15
1.Land
Building
Donated Capital
60,000
40,000
100,000
2.The agreement to employ 350 people for 10 years is disclosed in a note to the financial statements, if
material.
3.Even though title would not pass to the company for 10 years, the land and building is still recorded on the
books of the company. Disclosure of the contingency associated with the title is included in the notes to
the financial statements.
E9-16
1.Capitalized interest = Average cost x Interest rate
= [($0 + $700,000)  2] x 12%
= $42,000
2.The capitalized interest increases the cost of the building and therefore increases the depreciation expense
each year of the assets' life.
E9-17
Capitalized interest = Average cost x Interest rate
= [($0 + $6,000,000)  2] x 12%
= $360,000
Interest revenue = Average temporary investment x Interest rate
= ($8,000,000 - $3,000,000) x 11%
= $550,000
E9-18
The following are recorded as capital expenditures:
1.Cost of installing machinery
2.Cost of moving machinery
4.Cost of major overhaul
5.Installation of safety device (unless no economic benefits are realized)
7.Property taxes on land and buildings held for investment
8.Cost of rearranging offices
The following are recorded as operating expenditures:
3.Repairs as a result of an accident
6.Property taxes on land and buildings
9.Cost of repainting offices
9-24
10.Ordinary repairs
E9-19
1.a.Successful-efforts method. 40% of drilling is unsuccessful. Therefore:
40% x $2,000,000 = $800,000 is expensed
b.Full-cost method. All costs are capitalized, so no drilling expense is recognized.
2.Value on balance sheet (before recording depletion)
a.Successful-efforts method. 60% of drilling efforts are successful. Therefore:
60% x $2,000,000 = $1,200,000 appears on the balance sheet
as oil and gas properties
b.Full-cost method. All drilling costs are capitalized; therefore, $2,000,000 appears on the balance sheet
as oil and gas properties.
9-25
9-26
SOLUTIONS TO PROBLEMS
P9-1
Adjusting entries at December 31, 2001 to correct the books. All original entries must be reversed out of the
Land and Buildings account and recorded in correct accounts.
1.Land
24,500
Land and Buildings
To record purchase, demolition of old
building, and legal fees in separate
Land account.
24,500
2.Building
2,700
Land and Buildings
Interest on loan for construction.
2,700
3.Building
50,000
Land and Buildings
To record cost of construction
in separate Building account.
50,000
4.Land Improvements
Land and Buildings
Sewer assessment.
1,200
1,200
5.Land
3,500
Land and Buildings
Cost of landscaping.
Note: If the landscaping has a limited
life, the cost should be recorded in the
Land Improvements account.
3,500
6.Equipment
Land and Buildings
Excavation equipment purchase.
18,000
18,000
7.Building
15,000
Land and Buildings
Fixed overhead charged to building
construction (alternatively, this item
could be charged to regular production
through Goods in Process).
15,000
8.Building
1,000
Land and Buildings
Cost of insurance during construction
(alternatively, could be recorded as
Insurance Expense).
1,000
9-27
9.Profit (Gain) on Construction
Land and Buildings
Reversing of profit improperly recognized.
12,000
12,000
P9-1 (continued)
10.Loss Due to Worker's Injury
Land and Buildings
To expense cost to compensate
construction worker.
3,000
11.Loss Due to Modifications to Building
Land and Buildings
To expense avoidable costs required by
inspectors due to planning error.
7,500
3,000
7,500
12.Land
2,500
Land and Buildings
1998 property tax expense on land
(alternatively, could be recorded
as Property Tax Expense).
2,500
13.Land and Buildings
Land
Credit to Land account for salvage
value of demolished building.
700
700
14.Land and Buildings
Loss on Sale of Equipment
Equipment
To write off equipment sold and recognize
loss on sale (note that Depreciation should
have been recorded; however, the total of
the depreciation and the loss would be $4,000).
14,000
4,000
18,000
P9-2
Note: This question requires knowledge that corrections of errors in prior years are recorded to Retained
Earnings. This was briefly discussed in Chapter 4.
Adjusting entries at December 31, 2002 to correct the books. The building and machinery should be recorded
in separate accounts.
Purchase price of $60,000 is a lump-sum purchase:
Building
Machinery
$39,000
60%
26,000
40%
$65,000
100%
Machinery is valued at 40% x $60,000 = $24,000
Building is valued at 60% x $60,000 = $36,000
9-28
Machinery
Building
Property, Plant, and Equipment
24,000
36,000
60,000
P9-2 (continued)
Machinery
Building
Property, Plant, and Equipment
The legal fees are allocated in the same
proportion as the original purchase.
280
420
700
Retained Earnings
Property, Plant, and Equipment
To correct the insurance paid in 2000 that
was incorrectly recorded in the asset account.
2,400
Property, Plant, and Equipment
Accumulated Depreciation: Building
Accumulated Depreciation: Machinery
Retained Earnings
To remove the depreciation of $6,310 incorrectly
credited to Property, Plant, and Equipment in 2000;
to credit the correct depreciation to Accumulated
Depreciation: Building ($36,420  20); to credit
the correct depreciation to Accumulated Depreciation:
Machinery ($24,280  8); and to correct the amount
recorded as depreciation expense by a credit to
Retained Earnings.
6,310
Retained Earnings
Property, Plant, and Equipment
To correct the 2001 repairs that were
incorrectly recorded in the asset account.
2,000
2,400
1,821
3,035
1,454
2,000
Building
Property, Plant, and Equipment
To properly classify the 2001 addition
to the building.
10,000
10,000
Property, Plant, and Equipment
Accumulated Depreciation: Building
Accumulated Depreciation: Machinery
Retained Earnings
To remove the depreciation of $6,879 incorrectly
credited to Property, Plant, and Equipment in 2001;
to credit the correct depreciation to Accumulated
Depreciation: Building [$1,821 + ($10,000  19)]
(this assumes the addition has the same life as the
building); to credit the correct depreciation to
9-29
6,879
2,347
3,035
1,497
Accumulated Depreciation: Machinery ($24,280  8);
and to correct the amount recorded as depreciation
expense by a credit to Retained Earnings.
Repairs Expense
Property, Plant, and Equipment
To expense the repairs for 2002,
before the books are closed.
3,000
3,000
P9-2 (continued)
Insurance Expense
Prepaid Insurance
Property, Plant, and Equipment
To correctly classify the 2002 insurance
payment, before the books are closed.
1,400
1,400
2,800
Machinery
Property, Plant, and Equipment
To correctly classify the machinery
purchased in 2002.
7,000
7,000
Loss on Disposal of Machinery
Property, Plant, and Equipment
Accumulated Depreciation: Machinery
Machinery
To correctly record the disposal of the
machinery in 2002; the machine is 2 years
old and so has $200 related accumulated
depreciation.
100
500
200
800
Property, Plant, and Equipment
Accumulated Depreciation: Building
Accumulated Depreciation: Machinery
Depreciation Expense
To remove the depreciation of $7,421
incorrectly credited to Property, Plant,
and Equipment in 2002; to credit the
correct depreciation to Accumulated
Depreciation: Building; to credit the
correct depreciation to Accumulated
Depreciation: Machinery [($24,280 + $7,000 $800)  8]; and to correct the depreciation
expense before the books are closed.
7,421
2,347
3,810
1,264
P9-3
1.Investment in Land
Cash
74,000
74,000
9-30
2.Land
50,000a
Buildings
Common Stock, $3 par
Additional Paid-in Capital on Common Stock
a($60,000
150,000b
60,000
140,000
 $240,000) x $200,000
b($180,000
 $240,000) x $200,000
3.Machinery and Equipmenta
Repair Expense
Cash
a$120,000
153,000
2,000
155,000
+ $7,000 + $10,000 + $16,000
P9-3 (continued)
4.Land Improvements
Cash
5.Cash
30,000
30,000
6,000
Accumulated Depreciation
Machinery and Equipment
Gain on Disposal
6.Land
16,000
20,000
2,000
60,000a
Buildings
Investment in Land
Cash
78,000b
37,000
101,000
a$37,000
+ $26,000 - $3,000
b$60,000
+ $18,000 (imputed interest is ignored)
7.Leasehold Improvements
Cash
20,000
8.Machinery and Equipment
Cash
32,000
20,000
32,000
Royalty Expense
Cash
12,000
12,000
P9-4 (CMA adapted solution)
1.Raw Materials
Iron castings
Other raw materials
$61,040
50,200
Direct Labor
Layout (90 x $5.00)
$ 450
9-31
$111,240
Electricians [(380 - 80) x $9.00]
Machinery [(1,100 - 200) x $8.00]
Heat treatment (100 x $7.50)
Assembly [(450 - 100) x $7.00]
Testing [(180 - 20) x $8.00]
Additional testing labor [(180 - 20) x $5.00)
800
Factory Overhead
Layout and electricians ($3,150 x 0.70)
Machining, heat treatment, assembly,
testing ($12,480 x 1.00)
Interest Paid
Total amount to be capitalized
2,700
7,200
750
2,450
1,280
15,630
$ 2,205
12,480
14,685
4,260
$145,815
P9-4 (continued)
2.Alternate procedures are possible for two costs--rework costs (affects direct labor, repairs and maintenance,
and factory overhead) and factory overhead.
a.Rework costs should be treated as a cost of the period when they are abnormal. Rework costs
arising from errors that ought not to have occurred should be treated as losses of the period.
Apparently, this was the case in this situation because the damage resulted from a type of error
that was not expected. Consequently, rework costs and related repairs and maintenance
expenses ($1,340) were not capitalized in Requirement 1.
Rework costs can be capitalized when they are considered normal and can be explained by errors
resulting from the uncertainties associated with the new machine design. When this occurs,
rework and repairs and maintenance are necessary to make the machine operational.
b.There are three alternate ways to allocate overhead costs to self-constructed assets. The method
followed in Requirement 1 was to assign a full share of all overhead costs to the self-constructed
asset. The reasoning justifying this treatment is that all productive output should absorb its
proportionate share of all factory overhead costs.
A second method is to capitalize variable and traceable fixed overhead (however, there was no
traceable fixed overhead). Variable and traceable fixed overheads are incurred to build the asset
and will benefit future periods; consequently, these costs should be capitalized. Nontraceable
fixed overhead costs would have been incurred in any case so that there is no causal relationship
between the fixed overhead costs and the self-constructed asset; therefore, these overhead
costs would not be capitalized.
A third method is to assign no overhead to the self-constructed asset. The reasoning used in this case
is that overhead is primarily a fixed expense and chargeable only to normal operations.
P9-5
1.Stock exchanged: 1,000 shares at $25/share = $25,000
Land
Common Stock, $10 par
25,000
10,000
9-32
Additional Paid-in Capital on Common Stock
15,000
2.A charge (debit) to Accumulated Depreciation is the best method for this replacement since a separate value
for the old engine is not known.
Accumulated Depreciation: Truck
Cash (Accounts Payable, etc.)
1,000
1,000
P9-5 (continued)
3.Land is acquired:
Land
Preferred Stock, $50 par
Additional Paid-in Capital on Preferred Stock
50,000
25,000
25,000
The value of $45,000 may be the most conservative, but the value of $50,000 has the advantage of greater
verifiability. The value at which the stock was traded 2 months ago is out of date.
4.The present value of the 2-year noninterest-bearing note, using the 10% imputed interest rate, is: $10,000 x
0.826446* = $8,264
*Factor from Table 3 of Appendix D
Machinery
Discount on Notes Payable
Notes Payable
8,264
1,736
10,000
P9-6 (AICPA adapted solution)
1.
TOWNSAND COMPANY
Analysis of Land Account
for 2001
Balance at January 1, 2001
Land site number 621:
Acquisition cost
Commission to real estate agent
Clearing costs
Less: Amounts recovered
Total land site number 621
$ 100,000
$1,000,000
60,000
$15,000
(5,000)
10,000
1,070,000
Land site number 622:
Land value
Building value
Demolition cost
Total land site number 622
Balance at December 31, 2001
$ 200,000
100,000
30,000
330,000
$1,500,000
TOWNSAND COMPANY
9-33
Analysis of Buildings Account
for 2001
Balance at January 1, 2001
Cost of new building constructed on
land site number 622:
Construction costs
Excavation fees
Architectural design fees
Building permit fee
Balance at December 31, 2001
P9-6 (continued)
1. (continued)
$800,000
$150,000
11,000
8,000
1,000
170,000
$970,000
TOWNSAND COMPANY
Analysis of Leasehold Improvements Account
for 2001
Balance at January 1, 2001
Electrical work
Construction of extension to current
work area ($80,000 x ½)
Office space
Balance at December 31, 2001
$500,000
35,000
40,000
65,000
$640,000
TOWNSAND COMPANY
Analysis of Machinery and Equipment Account
for 2001
Balance at January 1, 2001
Cost of new machines acquired:
Invoice price
Freight costs
Unloading charges
Balance at December 31, 2001
$700,000
$75,000
2,000
1,500
78,500
$778,500
2.Items in the fact situation which were not used to determine the answer to Requirement 1 above, and where,
or if, these items should be included in Townsand's financial statements are as follows:
a.Land site number 623, which was acquired for $600,000, should be included in Townsand's balance
sheet as land held for resale.
b.Painting of ceilings for $10,000 should be included as a normal operating expense in Townsand's
income statement.
c.Royalty payments of $13,000 should be included as a normal operating expense in Townsand's
income statement.
P9-7
9-34
1.Exchange of similar productive assets
Hurni Company
Machine (new)
Accumulated Depreciation: Machine
Loss
Machine (old)
Cash
10,000b
25,000
7,000a
40,000
2,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $8,000 - $15,000
bCost
= FV of asset surrendered + Boot paid = $8,000 + $2,000
P9-7 (continued)
1. (continued)
Other Company
Cash
Machine (new)
Machine (old)
aGain
2,000
8,000a
10,000
= 0 (FV of asset surrendered = BV of asset surrendered)
Cost = BV of asset surrendered + Gain - Boot received
= $10,000 + 0 - $2,000
Note: Hurni Company's journal entry is consistent with alternative 3 in Exhibit 9-2. The Other Company's
journal entry is consistent with alternative 6 in Exhibit 9-2.
2.Exchange of dissimilar productive assets: all gains and losses recognized
Hurni Company
Building
Land
Cash
Gain
55,000
30,000
5,000
20,000a
aGain
= (FV of asset surrendered - BV of asset surrendered)
= $50,000 - $30,000
Other Company
Cash
Land
Building
aGain
5,000
50,000a
55,000
= 0 (FV of asset surrendered = BV of asset surrendered)
Cost = FV of asset surrendered - Boot received = $55,000 - $5,000
9-35
3.Exchange of similar productive assets
Hurni Company
Machine (new)
Accumulated Depreciation: Machine
Machine (old)
Cash
aGain
13,000a
2,000
13,000
2,000
is not recognized (since no boot is received)
Cost = BV of asset surrendered + Boot paid
= $11,000 + $2,000
P9-7 (continued)
3. (continued)
Other Company
Cash
Machine (new)
Machine (old)
aGain
2,000
18,000a
20,000
= 0 (BV of asset surrendered = FV of asset surrendered)
Cost = BV of asset surrendered + Gain - Boot received
= $20,000 + 0 - $2,000
Note: Hurni Company's journal entry is consistent with alternative 4 in Exhibit 9-2. The Other Company's
journal entry is consistent with alternative 6 in Exhibit 9-2.
4.Exchange of similar productive assets
Hurni Company
Equipment: Car (new)
Accumulated Depreciation: Equipment
Cash
Equipment: Car (old)
Gain
aTotal
4,412b
2,000
800
7,000
212a
gain = FV of asset surrendered - BV of asset surrendered
= $6,800 - $5,000
= $1,800
Boot
$800
Gain recognized =
(FV-BV) =
($1,800) = $212
Boot + Fair value
($800+$6,000)
(rounded)
of asset received
bCost
= BV of asset surrendered + Gain - Boot = $5,000 + $212 - $800
9-36
Other Company
Equipment: Car (new)
Cash
Equipment: Car (old)
aGain
6,800a
800
6,000
= 0 (BV of asset surrendered = FV of asset surrendered)
Cost = BV of asset surrendered + Boot paid = $6,000 + $800
Note: Hurni Company's journal entry is consistent with alternative 6 in Exhibit 9-2. The Other Company's
journal entry is consistent with alternative 4 in Exhibit 9-2.
P9-8
1.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
Machine (old)
Cash
aGain
29,000a
15,000
40,000
4,000
is not recognized (since no boot is received)
Cost = BV of asset surrendered + Boot paid
= $25,000 + $4,000
Note: This journal entry is consistent with alternative 4 in
Exhibit 9-2.
2.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
Loss
Machine (old)
Cash
34,000b
7,000
3,000a
40,000
4,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $30,000 - $33,000
bCost
= FV of asset surrendered + Boot paid = $30,000 + $4,000
Note: This journal entry is consistent with alternative 3 in
Exhibit 9-2.
3.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
16,875b
25,000
9-37
Cash
Machine (old)
Gain
aTotal
5,000
45,000
1,875a
gain = (FV of asset surrendered - BV of asset surrendered)
= ($32,000 - $20,000) = $12,000
Boot
$5,000
Gain recognized =
(FV-BV) =
($12,000)
Boot + Fair value
$5,000 + $27,000
of asset received
= $1,875
bCost
= BV of asset surrendered + Gain - Boot = $20,000 + $1,875 - $5,000
Note: This journal entry is consistent with alternative 6 in
Exhibit 9-2.
P9-8 (continued)
4.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
Loss
Cash
Machine (old)
27,000b
9,000
4,000a
5,000
45,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $32,000 - $36,000
bCost
= FV of asset surrendered - Boot received
= $32,000 - $5,000
Note: This journal entry is consistent with alternative 5 in
Exhibit 9-2.
5.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
Machine (old)
aGain
80,000a
70,000
150,000
is not recognized (since no boot is received)
Cost = BV of asset surrendered = $80,000
Note: This journal entry is consistent with alternative 2 in
9-38
Exhibit 9-2.
6.Exchange of similar productive assets
Machine (new)
Accumulated Depreciation: Machine
Loss
Machine (old)
90,000b
56,000
4,000a
150,000
aLoss
= FV of asset surrendered - BV of asset surrendered
= $90,000 - $94,000
bCost
= FV of asset surrendered = $90,000
Note: This journal entry is consistent with alternative 1 in
Exhibit 9-2.
7.Exchange of dissimilar productive assets: all gains or losses recognized
Building
Gain
Land
200,000
70,000
130,000
P9-8 (continued)
8.Exchange of dissimilar productive assets: all gains or losses recognized
Building
Gain
Cash
Land
200,000
40,000
30,000
130,000
9.Exchange of dissimilar productive assets: all gains or losses recognized
Building
Cash
Gain
Land
200,000
20,000
90,000
130,000
P9-9
Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]
1.Average costs, 2001 $1,000,000 [($0 + $2,000,000)  2]
Average costs, 2002 $4,000,000 [($2,000,000 + $120,000) +
($2,120,000 + $3,760,000)  2]
Average costs, 2003 $8,500,000 [($2,120,000 + $3,760,000 + $458,000) +
($6,338,000 + $4,324,000)  2]
9-39
Capitalized interest, 2001 = $1,000,000 x 12%
= $120,000
Capitalized interest, 2002 = ($3,000,000 x 12%) + ($1,000,000 x 9.8%a)
= $360,000 + $98,000
= $458,000
Capitalized interest, 2003 = [($3,000,000x12%) + ($5,500,000x9.8%)] x 1/2b
= ($360,000 + $539,000) x 1/2
= $449,500
$ 6,000,000
$14,000,000
(
x 14%) + (
x 8%)
$20,000,000
$20,000,000
a
bSince
the project is completed on June 30, 2003, interest for half a
year is capitalized.
P9-9 (continued)
2.Total costs = Expenditures + Capitalized interest
= ($2,000,000 + $3,760,000 + $4,324,000) + ($120,000 +
$458,000 + $449,500)
= $11,111,500
Cost - Estimated residual value
Straight-line depreciation =
Estimated service life
$11,111,500 - $0
=
20
= $555,575 in 2004
3.The interest capitalization has the following effects on the financial statements:
Income Statement:
9-40
2001:Interest expense decreased by $120,000. Net income increased by $120,000.
2002:Interest expense decreased by $458,000. Net income increased by $458,000.
2003:Interest expense decreased by $449,500. Net income increased by $449,500.
Balance Sheet:
December 31, 2001:Asset (construction in process) increased by $120,000. Retained earnings
increased by $120,000.
December 31, 2002:Asset (construction in process) increased by $458,000 for a total of $578,000.
Retained earnings increased by $458,000, for a total of $578,000.
December 31, 2003:Asset (construction in process) increased by $449,500 for a total of $1,027,500.
Retained earnings increased by $449,500, for a total of $1,027,500.
Cash Flow Statement:
If the company is producing the asset for its own use, the cash paid for the interest that is capitalized is
included in cash outflows for investing activities instead of cash flows from operating activities. There
would be no affect if the company was producing the asset for sale to others.
P9-10
Supporting computations: Construction costs, (excluding capitalized interest)
2001: $ 6,000,000
2002: $11,460,000
2003: $ 1,800,000
Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]
Average costs, 2001 = $ 3,000,000 [($0 + $6,000,000)  2]
2002 = $12,000,000 [($6,000,000 + $270,000) +
($6,270,000 + $11,460,000)  2]
2003 = $20,000,000 [($6,270,000,000 + $11,460,000 +
$1,370,000) + ($19,100,000 + $1,800,000)  2]
Capitalized interest, 2001 = $3,000,000 x 12% x 9/12a
= $270,000
2002 = ($10,000,000 x 12%) + ($2,000,000 x 8.5%)b
= $1,370,000
2003 = [($10,000,000x12%) + ($10,000,000x8.5%)] x 3/12c
= $512,500
9-41
Interest revenue, 2001 = ($10,000,000 - $3,000,000) x 11%
= $770,000
Interest expense, 2001 = ($20,000,000 x 10%) + ($60,000,000 x 8%) +
($10,000,000 x 12%) - $270,000
= $2,000,000 + $4,800,000 + $1,200,000 - $270,000
= $7,730,000
2002 = $2,000,000 + $4,800,000 + $1,200,000 - $1,370,000
= $6,630,000
2003 = $2,000,000 + $4,800,000 + $1,200,000 - $512,500
= $7,487,500
aSince
activities were suspended for 3 months, interest is only capitalized
for 9 months.
b$20,000,000
$60,000,000
x 10% +
x 8%
$80,000,000
$80,000,000
cSince
the project is completed on March 31, 2003, interest for three months
is capitalized.
P9-10 (continued)
1.Journal entries, 2001:
Construction in Progress
Cash
6,000,000
6,000,000
Cash [($10M - $3M) x 0.11]
Interest Revenue
770,000
770,000
Interest Expense
Construction in Progress
Cash [($10Mx0.12)+($20Mx0.10)+($60Mx0.08)]
7,730,000
270,000
8,000,000
Journal entries, 2002:
Construction in Progress
Cash
11,460,000
11,460,000
Interest Expense
Construction in Progress
Cash
6,630,000
1,370,000
8,000,000
Journal entries, 2003:
9-42
Construction in Progress
Cash
1,800,000
Interest Expense
Construction in Progress
Cash
7,487,500
512,500
Power Plant
Construction in Progress
21,412,500*
1,800,000
8,000,000
21,412,500
*$6,000,000 + $270,000 + $11,460,000 + $1,370,000 + $1,800,000 + $512,500
2.If the 3 month suspension was due to an environmental dispute, activities would still be in progress
according to FASB Statement No. 34. Therefore interest for a full year would be capitalized in 2001
($3,000,000 x 12% = $360,000) and therefore the journal entry to record the interest payment would be:
Interest Expense
Construction in Progress
Cash
7,640,000
360,000
8,000,000
P9-11
2001
Jan. 10 Accumulated Depreciation: Machinery
Cash (Accounts Payable, etc.)
Replacement of motor.
24
800
Cash
Accumulated Depreciation: Machinery
Loss on Sale of Machinery
Machinery
Sale of machine.
Feb. 3 Loss on Demolition of Building
Materials Inventory
Accumulated Depreciation: Building
Building
Cash (Accounts Payable, etc.)
Demolition of old building.
14
800
400
9,000
600
10,000
1,700
500
25,000
25,000
2,200
Repair Expense
Cash (Accounts Payable, etc.)
Repairs to machine.
700
700
Mar. 10 Repair Expense
Cash (Accounts Payable, etc.)
Repairs due to accident.
2,000
2,000
19
Machinery
Cash (Accounts Payable, etc.)
9-43
900
900
Replacement of motor.
27
Office Fixtures
Office Expenses
Cash (Accounts Payable, etc.)
Office rearrangement.
700
300
1,000
P9-12 (AICPA adapted solution)
1.Adjusting journal entries, December 31, 2001
(1)Buildings
2,000
Machinery and Equipment
To correct the recording of the cost of
constructing the small storage building.
2,000
(2)Due from Officers
Machinery and Equipment
To correct the recording of the cost of the
power lawnmower purchased for the personal
use of the president.
600
600
P9-12 (continued)
1. (continued)
(3)Accumulated Depreciation: Machinery and Equipment
Gain or Loss on Retirement of Machinery and
Equipment
Machinery and Equipment
To record retirement of damaged fork lift truck
battery; the asset has been depreciated for 3
years at $60 per year.
180
420
600
(4)Prepaid Equipment Rental Expense
Equipment Rental Expense
Gain or Loss on Retirement of Machinery
and Equipment
Machinery and Equipment
To remove equipment rental expense and prepayment
from Machinery and Equipment account.
180
180
(5)Machinery and Equipment
Accumulated Depreciation: Machinery and Equipment
Gain or Loss on Retirement of Machinery and
Equipment
Machinery and Equipment
To record retirement of Rockwood saw and gain
on sale.
150
1,500
9-44
40
320
150
1,500
(6)Machinery and Equipment Held for Sale
Accumulated Depreciation: Machinery and Equipment
Gain or Loss on Retirement of Machinery and
Equipment
Machinery and Equipment
To record retirement of casting machine and
write-down to its market value.
1,800
2,500
700
5,000
(7)Machinery and Equipment
Interest Expense
Notes Payable
To record full cost of baking oven purchased
on installment payment plan and interest
charges paid in December.
6,964
36
7,000
(8)Accumulated Depreciation: Machinery and Equipment
Depreciation Expense: Machinery and Equipment
To correct recording of depreciation:
Recorded by company $2,800
Correct depreciation (2,560) (see schedule C)
Correction
$ 240
240
240
P9-12 (continued)
2.Schedules
THE DEWOSKIN COMPANY
Machinery and Equipment Acquisitions
December 31, 2001
(Schedule A)
Burnham grinder
Air compressor
Electric spot welder
Baking oven
Total
$ 1,200
2,500
4,500
10,000
$18,200
Machinery and Equipment
(Schedule B)
Balance
12/31/00
1990 $ 5,900
1991
400
1992
-1993
-1994
3,900
1995
-1996
5,300
1997
--
2001
2001
Balance
Retirements Additions 12/31/01
$1,500 (5)
-$ 4,400
--400
--------3,900
---5,000 (6)
-300
---9-45
1998
1999
2000
2001
4,200
600 (3)
-3,600
----5,700
--5,700
--$18,200
18,200
$25,400 $7,100
$18,200
$36,500
Accumulated Depreciation
(Schedule C)
Balance
12/31/00
1990 $ 5,900
1991
380
1992
-1993
-1994
2,535
1995
-1996
2,385
1997
-1998
1,050
1999
-2000
285
2001
-$12,535
2001
2001
Balance
Retirements Provision 12/31/01
$1,500 (5)
-$ 4,400
-$ 20
400
-------390
2,925
---2,500 (6)
280
165
---180 (3)
390
1,260
----570
855
-910
910
$4,180
$2,560
$10,915
P9-13 (AICPA adapted solution)
1.Depreciation Expense: Building
Accumulated Depreciation: Building
To record one-half year's depreciation
on old boiler ($10,000 x 4% x 1/2).
200.00
200.00
2.Building
2,000.00
Gain or Loss on Disposition of Fixed Assets
To correct the recording of insurance recovery.
3.Purchase Discountd
Fuel Expensea
Fuel Inventorya
Accumulated Depreciation: Buildingb
Gain or Loss on Disposition of Fixed Assetsc
Building
To correct the recording of the purchase of
the new boiler and the trade-in of the old.
2,000.00
274.40
741.60
82.40
6,200.00
2,320.00
9,618.40
aComputation
of fuel expense
Fuel oil included in invoice
price of new boiler
(1,000 gallons at $0.80)
Sales tax at 3%
$800.00
24.00
9-46
Fuel cost
$824.00
100
Less: Fuel inventory ($824 x
1,000
)
(82.40)
Fuel expense $741.60
bComputation
of accumulated depreciation on building:
$10,000 x 4% x 15½ years = $6,200.00
cComputation
of gain or loss on disposition of fixed assets:
Cost of old boiler
Accumulated depreciation
Book value at time of explosion
Less trade-in allowance
(fair market value)
Tentative loss on disposition
dComputation
$10,000.00
(6,200.00)
$ 3,800.00
(1,480.00)
$ 2,320.00
of cash discount on purchase of boiler:
Invoice price
Less: Fuel oil included in
invoice price
Trade-in allowance
$16,000.00
$ 800.00
1,480.00
Purchases discount at 2%
(2,280.00)
$13,720.00
$ 274.40
P9-13 (continued)
4.Building
1,000.00
Repair Expense
To correct the recording of the
cost of installation of the boiler.
1,000.00
5.Depreciation Expense: Buildinge
Accumulated Depreciation: Building
To correct recorded depreciation expense
on the building and the new boiler.
22.19
22.19
eCost
of building
Less cost of old boiler (depreciation
recorded in entry no. 1)
Cost subject to full year of depreciation
$100,000.00
(10,000.00)
$ 90,000.00
Depreciation at 4%
Cost of new boiler
$ 3,600.00
$ 16,381.60
Depreciation on new boiler
9-47
($16,381.60  9½ x ½)
(New boiler is depreciated over
remaining life of the buildings)
862.19
Total adjusted depreciation
Depreciation recorded
Depreciation adjustment required
$ 4,462.19
(4,440.00)
$ 22.19
Cost of new boiler:
Invoice price
Less: Fuel oil
Remainder
$16,000.00
Add: Sales tax
Installation
Total
Less: Cash discount
Cost of new boiler
$ 456.00
1,000.00
$16,656.00
(800.00)
$15,200.00
1,456.00
(274.40)
$16,381.60
P9-14
1.a.Successful-efforts method: The cost of dry wells (50% x $5 million) is expensed in 2001. The cost of
successful wells (50% x $5 million) is capitalized in 2001 and expensed over the life of the wells.
On the income statement for 2002, cost depletion expense is reported at $250,000 (10% x $2.5 million).
On the 2002 ending balance sheet, the asset is reported at a net value of $2,250,000 (the $2,500,000
cost less the $250,000 depletion).
b.Full-cost method: The total cost of $5 million is capitalized in 2001.
On the income statement for 2002, cost depletion expense is reported at $500,000 (10% x $5 million).
On the 2002 ending balance sheet, the asset is reported at a net value of $4,500,000 (the $5 million cost
less the $500,000 depletion).
2.Small oil companies generally prefer the full-cost method because it results in higher asset values on the
balance sheet and delaying the recognition of expenses in the income statement.
9-48