BRIEF EXERCISES
Brief Exercise 10–1
Capitalized cost of the machine:
Purchase price
Freight
Installation
Testing
Total cost
$35,000
1,500
3,000
2,000
$41,500
Note: Personal property taxes on the machine for the period after acquisition are
not part of acquisition cost. They are expensed in the period incurred.
Brief Exercise 10–2
Capitalized cost of land:
Purchase price
Broker’s commission
Title insurance
Miscellaneous closing costs
Demolition of old building
Total cost
$600,000
30,000
3,000
6,000
18,000
$657,000
All of the expenditures, including the costs to demolish the old building, are
included in the initial cost of the land.
Solutions Manual, Vol.1, Chapter 10
© The McGraw-Hill Companies, Inc., 2013
10–7
Brief Exercise 10–3
Cost of land and building:
Purchase price
Broker’s commission
Title insurance
Miscellaneous closing costs
Total cost
$600,000
30,000
3,000
6,000
$639,000
The total must be allocated to the land and building based on their relative fair
values:
Percent of Total
Fair Value
Asset
Land
Building
Fair Value
$420,000
280,000
$700,000
60%
40
100%
Initial
Valuation
(Percent x
$639,000)
$383,400
255,600
$639,000
Brief Exercise 10–4
Cost of silver mine:
Acquisition, exploration, and development
Restoration costs
†
$5,600,000
429,675 †
$6,029,675
$500,000 x 20% = $100,000
550,000 x 45% = 247,500
650,000 x 35% = 227,500
$575,000 x .74726* = $429,675
*Present value of $1, n = 5, i = 6% (from Table 2)
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10–8
Intermediate Accounting, 7/e
Brief Exercise 10–5
After one year, the liability will increase to $455,456.
($429,675† + ($429,675 x 6%) = $455,456)
†
$500,000 x 20% = $100,000
550,000 x 45% = 247,500
650,000 x 35% = 227,500
$575,000 x .74726* = $429,675
*Present value of $1, n = 5, i = 6% (from Table 2)
Actual restoration costs
Less: Asset retirement liability
Loss on retirement
$596,000
(575,000)
$ (21,000)
Brief Exercise 10–6
Calculation of goodwill:
Consideration exchanged
Less fair value of net assets:
Book value of assets
Plus: Excess of fair value over book value
of intangible assets
Goodwill
$14,000,000
$8,300,000
2,500,000
(10,800,000)
$ 3,200,000
Brief Exercise 10–7
The initial value of machinery and note will be the present value of the note
payment:
PV = $60,000 (.85734* ) = $51,440
* Present value of $1: n = 2, i = 8% (from Table 2)
Interest expense for July 1 to December 31, 2011:
$51,440 x 8% x 6/12 = $2,058
Solutions Manual, Vol.1, Chapter 10
© The McGraw-Hill Companies, Inc., 2013
10–9
Brief Exercise 10–8
The cost of the patent equals the fair value of the stock given in exchange:
50,000 x $22 = $1,100,000
Brief Exercise 10–9
Average PP&E for 2013 = ($740,000 + 940,000) ÷ 2 = $840,000
Net sales ÷ Average PP&E = Fixed-asset turnover ratio
÷ $840,000
=
3.25
?
Average PP&E x Fixed-asset turnover ratio = Net sales
x
3.25
= $2,730,000
$840,000
Brief Exercise 10–10
Proceeds
Less book value:
Gain on sale of equipment
$16,000
$80,000
(71,000)
9,000
$ 7,000
Journal entry (not required):
Cash .................................................................................
Accumulated depreciation (account balance) ....................
Gain (difference) ............................................................
Equipment (account balance) ..........................................
© The McGraw-Hill Companies, Inc., 2013
10–10
16,000
71,000
7,000
80,000
Intermediate Accounting, 7/e
Brief Exercise 10–11
Pickup trucks = Fair value of machinery plus cash paid
$17,000 + 8,000 = $25,000
Loss on exchange = $20,000 (book value) – 17,000 (fair value) = $3,000
Journal entry (not required):
Pickup trucks (determined above) .....................................
Accumulated depreciation (account balance) ....................
Loss (difference) ...............................................................
Cash ...........................................................................
Machinery (account balance) ..........................................
25,000
45,000
3,000
8,000
65,000
Brief Exercise 10–12
Pickup trucks = Fair value of machinery plus cash paid
$24,000 + 8,000 = $32,000
Gain on exchange = $24,000 (fair value) – 20,000 (book value) = $4,000
Journal entry (not required):
Pickup trucks (determined above) .....................................
Accumulated depreciation (account balance) ....................
Cash ...........................................................................
Gain (difference) ...........................................................
Machinery (account balance) ..........................................
Solutions Manual, Vol.1, Chapter 10
32,000
45,000
8,000
4,000
65,000
© The McGraw-Hill Companies, Inc., 2013
10–11
Brief Exercise 10–13
Pickup trucks = Book value of machinery plus cash paid
$20,000 + 8,000 = $28,000
No gain is recognized in this situation.
Journal entry (not required):
Pickup trucks (determined above) ......................................
Accumulated depreciation (account balance) ....................
Cash ............................................................................
Machinery (account balance) ..........................................
© The McGraw-Hill Companies, Inc., 2013
10–12
28,000
45,000
8,000
65,000
Intermediate Accounting, 7/e
Brief Exercise 10–14
Average accumulated expenditures:
January 1
March 31
June 30
$500,000 x
600,000 x
400,000 x
600,000 x
October 30
12/12
9/12
6/12
2/12
= $ 500,000
=
=
=
450,000
200,000
100,000
$1,250,000
Interest capitalized:
$1,250,000
– 700,000
$ 550,000
x 7% = $49,000
x 6.75%* = 37,125
$ 86,125 = Interest capitalized
* Weighted-average rate of all other debt:
$3,000,000
5,000,000
$8,000,000
x 8% = $240,000
x 6% =
300,000
$540,000
$540,000
= 6.75% weighted average
$8,000,000
Solutions Manual, Vol.1, Chapter 10
© The McGraw-Hill Companies, Inc., 2013
10–13
Brief Exercise 10–15
Average accumulated expenditures:
January 1, 2013
March 31, 2013
June 30, 2013
$500,000 x
600,000 x
400,000 x
600,000 x
October 30, 2013
12/12
9/12
6/12
2/12
= $ 500,000
=
=
=
450,000
200,000
100,000
$1,250,000
Interest capitalized:
$1,250,000
x
6.77%* = $84,625
* Weighted-average rate of all other debt:
$ 700,000
3,000,000
5,000,000
$8,700,000
x 7% = $ 49,000
x 8% =
240,000
x 6% = 300,000
$589,000
$589,000
= 6.77% weighted average
$8,700,000
Brief Exercise 10–16
Research and development:
Salaries
Depreciation on R & D facilities and equipment
Utilities and other direct costs
Payment to another company
Total R & D expense
$220,000
125,000
66,000
120,000
$531,000
Note: The patent filing and related legal costs and the costs of adapting the
product to a particular customer’s needs are not included as research and development
expense.
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10–14
Intermediate Accounting, 7/e