Exercise 1
E.10-8, On December 31, 2003, Alma Ata Inc, borrowed $ 3,000,000
at 12 % payable annually to finance the construction of a new
building. In 2004, the company made the following expenditures
related to this building, March 1, $ 360,000, June 1, $ 600,000,
July 1, $ 1,500,000, December 1, $ 1,500,000. Additional
information is provided as follows :
Other debt outstanding :
10 year, 13 % bond, December 31, 1997,
interest payable annually was
$ 4,000,000
6 year, 10 % note, dated December 31, 2001,
interest payable annually was
$ 1,600,000
March 1, 2004, expenditure included land costs of $ 150,000
Interest revenue earned in 2004
$
49,000
Instruction :
a. Determine the amount of interest to be capitalized in 2004 in
relation to the construction of the building
b. Prepare the journal entry to record the capitalization of interest
and the recognition of interest expense, if any, at December 31,
2004.
Answer of Exercise 1
a. Computation of Weighted Average Accumulated
Expenditures
_
Expenditures _
Date
Amount x Capitalization Period = W Average
Acc Expenditures
March 1 $
360,000 x 10/12
=$
300,000
June 1
$
600,000 x 7/12
=$
350,000
July 1
$ 1,500,000 x 6/12
=$
750,000
Dec 1
$ 1,500,000 x 1/12
=$
125,000
$ 3,960,000
$ 1,525,000
Answer of Exercise 1
W Avg Acc Expenditures x Interest Rate = Avoidable Interest
$ 1,525,000
x 12 %
= $ 183,000
Actual Interest
$ 3,000,000 x 12 % = $
360,000
$ 4,000,000 x 13 % = $
520,000
$ 1,600,000 x 10 % = $
160,000
$ 1,040,000
Avoidable interest lower than actual
b. Building
$ 183,000
Interest Expense $ 857,000
Cash
$ 1,040,000 (360+520+160)
Actual interest for year $ 1,040,000
Amount capitalized
($
183,000)
Interest expense debit
$
857,000
Exercise 2
E.10-13, Presented below is information related to Zonker Company.
1. On July 6 Zonker Company acquired the plant assets to Doonesbury
Company, which had discontinued operations. The appraised value of
the property is :
Land
Building
Machinery and equipment
Total
$
400,000
$ 1,200,000
$
800,000
$ 2,400,000
Zonker Company gave 12,500 shares of its $ 100 par value common
stock in exchange. The stock had a market value of $ 168 per share
on the date of the purchase of the property.
2. Zonker Company expended the following amounts in cash between
July 6 and December 15, the date when it first occupied the building
Repairs to building
$ 105,000
Construction of bases for machinery to be installed later
$ 135,000
Driveways and parking lots
$ 122,000
Remodeling of office space in building, including new partitions and walls $ 161,000
Special assessment by city on land
$ 18,000
3. On December 20, the company paid cash for machinery $ 260,000
subject to a 2 % cash discount and freight on machinery of $ 10,500.
Instructions :
Prepares entries on the books of Zonker Company for these transactions
Answer of Exercise 2
1. Land
350,000
Building
1,050,000
Machinery and Equipment
700,000
Common Stock (12,500 x $ 100)
Paid-in Capital in Excess of Par
1,250,000
850,000
($ 2,100,000 – $ 1,250,000 = $ 850,000)
(The cost of the plant assets is $ 2,100,000, or 12,500 x $ 168,The cost is allocated in proportion to
the appraised value: 1/6 to Land, 1/2 to Building, and 1/3 to Machinery and Equipment.)
2. Buildings ($ 105,000 plus $ 161,000)
Machinery and Equipment
Land Improvements
Land
Cash
3. Machinery and Equipment
Cash
266,000
135,000
122,000
18,000
541,000
265,300
($ 10,500 + $ 254,800, which is 98 % of $ 260,000.)
265,300
Exercise 3
P.10-8, Susquehanna Co, a wishes to exchange a machine used in its
operations. Susquehanna has received the following offers from
other companies in the industry.
1. Choctaw Company offered to exchange a similar machine plus $
23,000
2. Powhatan Company offered to exchange a similar machine
3. Shawnee Company offered to exchange a similar machine, but
wanted $ 8,000 in addition to Susquehanna’s machine.
In addition, Susquehanna contacted Seminole Corporation, a dealer
machines. To obtain a new machine, Susquehanna must pay $
93,000 in addition to trading in its old machine
Susquehanna Choctaw Powhatan Shawnee Seminole
Machine cost
$ 160,000 $ 120,000 $ 147,000 $ 160,000 $ 130,000
Acc depreciation
50,000
45,000
71,000
75,000
0
Fair value
92,000
69,000
92,000 100,000 185,000
Instructions :
For each of the four independent situations, prepare the journal
entries to record the exchange on the books of each company.
Answer of Exercise 3
1. Susquehanna Corporation
Cash
Machinery (new)
Accumulated Depreciation
Loss on Exchange of Machinery
Machinery (old)
23,000
69,000
50,000
18,000*
160,000
*Computation of loss: Book value $ 110,000
Fair value
(92,000)
Loss
$
18,000
Choctaw Company
Machinery (new)
Accumulated Depreciation
Loss on Exchange of Machinery
Cash
Machinery (old)
*Computation of loss: Book value $ 75,000
Fair value (69,000)
Loss
6,000
92,000
45,000
6,000*
23,000
120,000
Answer of Exercise 3
2. Susquehanna Corporation
Machinery (new)
Accumulated Depreciation
Loss on Exchange of machinery
Machinery (old)
92,000
50,000
18,000
160,000
Powhatan Company
Machinery (new) ($ 92,000 – $ 16,000)
Accumulated Depreciation
Machinery (old)
*Computation of gain deferred : Fair value
Book value
Gain deferred
76,000*
71,000
147,000
$ 92,000
(76,000)
$ 16,000
Answer of Exercise 3
3. Susquehanna Corporation
Machinery (new)
Accumulated Depreciation
Loss on Exchange of machinery
Machinery (old)
Cash
Shawnee Company
Machinery (new)
Accumulated Depreciation
Cash
Machinery (old)
Gain on Exchange of Machinery
100,000
50,000
18,000
160,000
8,000
78,200*
75,000
8,000
160,000
1,200**
*[$ 92,000 – ($ 15,000 – $ 1,200)] = $ 78,200
**Computation of Gain: _
$ 8,000
_ x ($ 100,000 – $ 85,000) = $ 1,200
$ 8,000 + $ 92,000
Answer of Exercise 3
4. Susquehanna Corporation
Machinery (new)
185,000
Accumulated Depreciation
50,000
Loss on Exchange of machinery 18,000
Machinery (old)
160,000
Cash
93,000
Seminole Company
Cash
Used Machine Inventory
Sales
Cost of Goods Sold
Inventory
93,000
92,000
185,000
130,000
130,000