Chapter 10 Group Work
1. Smith Inc. is constructing a building. The construction company received the following cash draws
throughout the year 2014 as construction progressed:
February 1
$ 87,000
March 1
$105,000
July 1
$ 98,000
September 1
$ 60,000
December 1
$ 90,000
Smith Inc. has borrowed a construction loan specifically for this project on January 1, 2014 in the
amount of $200,000 at 8%. Smith Inc. also has a long-term note outstanding in the amount of
$250,000 for which they are paying 11% interest, and they have issued $100,000 in Bonds for which
they are paying 10% to bondholders.
a) What is the Weighted Average of Expenditures Outstanding for Smith Inc. during the year 2014?
b) What is the Weighted Average Rate of interest Smith Inc. is paying on debt not specifically related
to the construction project?
c) What is the amount of “Avoidable Interest” Smith Inc. incurred in 2014?
d) What is the amount of “Actual Interest” that Smith Inc. will pay on debt for 2014?
e) What amount of Smith Inc.’s interest costs will be capitalized in 2014? What amount of Smith
Inc.’s interest costs will be expensed in 2014?
a)
b)
Weighted Average of Accumulated Expenditures Outstanding
February 1
$87,000 *
11/12
=
$79,750
March 1
$105,000 *
10/12
=
$87,500
July 1
$98,000 *
6/12
=
$49,000
September 1
$60,000 *
4/12
=
$20,000
December 1
$90,000 *
1/12
=
$7,500
$243,750
Weighted Average Rate on non-specific construction debt
$250,000 *
0.11
=
$27,500
$100,000 *
0.1
=
$10,000
$350,000
$37,500
$37,500 / $350,000 = 10.7%
c)
Avoidable Interest
$243,750
$200,000 *
$43,750 *
WA Exp OS
Spec Const. Loan
Non Spec Loans
Avoidable Interest
d)
Const. Loan
LT Note
Bonds
e)
8%
10.70%
Actual Interest Costs for the year
$200,000 *
0.08
$250,000 *
0.11
$100,000 *
0.1
Actual Interest Costs
Capitalize Avoidable Interest
Interest Expense for Year
$53,500
$20,681
$32,819
=
=
$16,000
$4,681
$20,681
=
=
=
$16,000
$27,500
$10,000
$53,500
2.
Company ABC exchanged equipment used in its manufacturing operations plus $15,000 cash for
equipment used in the operations of Company XYZ. The following information is given:
Equipment (Cost)
Accumulated Depreciation
FMV of Equipment
Cash Given Up
a)
Company ABC
$150,000
$ 87,000
$ 70,000
$ 15,000
Company XYZ
$180,000
$106,000
$ 85,000
Assume the exchange has commercial substance, prepare the journal entries to record
the exchange on the books of both companies.
ABC Exchange Has Commercial Substance
Cost
Accum. Dep
Book Value
$150,000
($87,000)
$63,000
Fair Value
Book Value
Gain on Exchange
DR
New Equipment
Accum Depreciation
Old Equipment
Cash
Gain on Exchange
$70,000
($63,000)
$7,000
CR
$85,000
$87,000
$150,000
$15,000
$7,000
XYZ Exchange Has Commercial Substance
Cost
Accum. Dep
Book Value
$180,000
($106,000)
$74,000
Fair Value
Book Value
Gain on Exchange
DR
New Equipment
Accum Depreciation
Cash
Old Equipment
Gain on Exchange
$85,000
($74,000)
$11,000
CR
$70,000
$106,000
$15,000
$180,000
$11,000
b) Assume the exchange lacks commercial substance, prepare the journal entries to record the
exchange on the books of both companies.
ABC Exchange Lacks (Does Not Have) Commercial Substance
Cost
Accum Dep
Book Value
$150,000
($87,000)
$63,000
Fair Value
Book Value
Gain on Exchange
$70,000
($63,000)
$7,000
Cash was Given - Defer ALL Gain
FV of New Equipment
Gain on Exchange
Cost Basis of New
Equipment
$85,000
($7,000)
$78,000
DR
New Equipment
Accum Depreciation
Old Equipment
Cash
CR
$78,000
$87,000
$150,000
$15,000
XYZ Exchange Lacks (Does Not Have) Commercial Substance
Cost
Accum Dep
Book Value
$180,000
($106,000)
$74,000
Fair Value
Book Value
Gain on Exchange
$85,000
($74,000)
$11,000
Cash was Received - Recognize a portion of Gain, Defer a portion
Cash / FMV of Exchange = $15,000 / $85,000 = 18%
$11,000 * 18% = $1,980 Recognize
$11,000 - $1,980 = $9,020 Defer
FV of New Equipment
Portion of Gain to Defer
Cost Basis of New
Equipment
$70,000
($9,020)
$60,980
DR
New Equipment
Accum Depreciation
Cash
Old Equipment
Gain on Exchange
CR
$60,980
$106,000
$15,000
$180,000
$1,980
3.
Landeer Inc. purchased a Building, Equipment, and Land for a lump sum purchase of $800,000.
market values at the time of purchase for the assets were as follows:
Building
$625,000
Equipment
$210,000
Land
$130,000
Prepare the journal entry Landeer Inc. would make to record this purchase.
Building
Equipment
Land
$625,000
$210,000
$130,000
$965,000
65% *
22% *
13% *
100%
$800,000
$800,000
$800,000
DR
Building
Equipment
Land
=
=
=
$520,000
$176,000
$104,000
$800,000
CR
$520,000
$176,000
$104,000
Cash
$800,000