Ch 10 Solution

© The McGraw-Hill Companies, Inc., 2009

Solutions Manual, Vol.1, Chapter 10 10-1

Exercise 10-1 Capitalized cost of land:

Purchase price $60,000

Demolition of old building $4,000

Less: Sale of materials (2,000) 2,000

Legal fees for title investigation 2,000

Total cost of land $64,000

Capitalized cost of building:

Construction costs $500,000

Architect's fees 12,000

Interest on construction loan 5,000

Total cost of building $517,000

Note: Property taxes on the land for the period after acquisition are not part of

acquisition cost. They are expensed in the period incurred.

Exercise 10-2 To record the purchase of a machine.

Machine ($45,000 + 2,200 + 700 + 1,000) ........................... 48,900

Accounts payable ........................................................ 47,200

Cash ............................................................................ 1,700

To record prepaid insurance for the machine.

Prepaid insurance ............................................................ 900

Cash ............................................................................ 900

EXERCISES


10-2 Intermediate Accounting, 5/e

Exercise 10-3

Requirement 1

Cost of land and building:

Purchase price $4,000,000

Title search and insurance 16,000

Legal fees 5,000

State transfer fees 4,000

Total cost $4,025,000

Note: The pro-rated property taxes for the period after acquisition are not

included in the initial valuation of the land and building. They are recorded

instead as prepaid taxes and expensed over the related period.

The total is allocated to the land and building based on their relative fair values:

Asset

Fair Value

Percent of Total

Fair Value

Initial

Valuation (Percent x

$4,025,000)

Land $3,300,000 75% $3,018,750

Building 1,100,000 25 1,006,250

$4,400,000 100% $4,025,000

Assets:

Land $3,018,750

Building 1,006,250

Land improvements:

Parking lot 82,000

Landscaping 40,000



Exercise 10-3 (concluded)

Requirement 2

Cost of land:


Title search and insurance 16,000

Legal fees 5,000

State transfer fees 4,000

Demolition of old building $250,000

Less: Sale of materials (6,000) 244,000

Clearing and grading costs 86,000

Total cost of land $4,355,000

Land improvements:

Parking lot 82,000

Landscaping 40,000



Exercise 10-4

Requirement 1

Cost of copper mine:

Mining site $1,000,000

Development costs 600,000

Restoration costs 303,939 †

$1,903,939

† $300,000 x 25% = $ 75,000

400,000 x 40% = 160,000

600,000 x 35% = 210,000

$445,000 x .68301* = $303,939

*Present value of $1, n = 4, i = 10% (from Table 2)

Requirement 2

Copper mine (determined above) ..................................... 1,903,939

Cash ($1,000,000 + 600,000) ........................................ 1,600,000

Asset retirement liability (determined above) ............. 303,939

Equipment (cost) ........................................................... 120,000

Cash .......................................................................... 120,000



Exercise 10-5

Organization cost expense ($12,000 + 3,000) .................... 15,000

Patent ($20,000 + 2,000) .................................................... 22,000

Pre-opening expenses .................................................... 40,000

Furniture ......................................................................... 30,000

Cash ............................................................................ 107,000

Exercise 10-6 Calculation of goodwill:

Consideration exchanged $17,000,000

Less fair value of net assets:

Assets $23,000,000

Less: Liabilities assumed (9,500,000) (13,500,000)

Goodwill $ 3,500,000

Exercise 10-7 Calculation of goodwill:

Consideration exchanged $11,000,000

Less fair value of net assets:

Book value of net assets $7,800,000

Plus: Fair value in excess of book value:

Property, plant, and equipment 1,400,000

Intangible assets 1,000,000

Less: Book value in excess of fair value:

Receivables (200,000) 10,000,000

Goodwill $ 1,000,000



Exercise 10-8

Asset

Fair Value

Percent of Total

Fair Value

Initial


$900,000)

Land ................. $ 300,000 30% $270,000

Building A ....... 450,000 45 405,000

Building B ....... 250,000 25 225,000

$1,000,000 100% $900,000



Exercise 10-9

Requirement 1

Tractor ($5,000 cash + 18,783† present value of note) ............. 23,783

Discount on note payable (difference) ............................. 6,217

Cash ............................................................................ 5,000

Note payable (face amount) ........................................... 25,000

† Present value of note payment:

PV = $25,000 (.75131* ) = $18,783

* Present value of $1: n = 3, i = 10% (from Table 2)

Requirement 2

2009: Interest expense ($18,783 x 10%) = $1,878

2010: Interest expense [($18,783 + 1,878) x 10%] = 2,066

Requirement 3

2009: $25,000 – ($6,217 – 1,878) = $20,661

2010: $25,000 – ($6,217 – 1,878 – 2,066) = 22,727



Exercise 10-10 Land:


Demolition and removal of old building 80,000

Clearing and grading 150,000

Closing costs 42,000

Total cost of land $1,472,000

Building:

Architect’s fees $ 50,000

Construction costs 3,250,000

Total cost of building $3,300,000

Machinery:

Purchase price $860,000

Freight charges 32,000

Special platforms and wire installation 12,000

Cost of trial runs 7,000

Total cost of machinery $911,000

Land improvements:

Landscaping $45,000

Sprinkler system 5,000

Fork lifts:

PV = $16,000 + 70,000 (.93458* ) = $81,421


Prepaid insurance $24,000



Exercise 10-11 To record the acquisition of land in exchange for common stock.

February 1, 2009

Land ............................................................................... 90,000

Common stock (5,000 shares x $18) ............................... 90,000

To record the acquisition of a building through purchase and donation.

November 2, 2009

Building .......................................................................... 600,000

Cash ........................................................................... 400,000

Revenue - donation of asset (difference) ...................... 200,000

Exercise 10-12

Requirement 1 ($ in millions)

Average PP&E for 2007 = ($3,893 + 3,440) ÷ 2 = $3,666.5

Net sales ÷ Average PP&E = Fixed-asset turnover ratio

$34,922 ÷ $3,666.5 = 9.52

Requirement 2

The fixed-asset turnover ratio indicates the level of sales generated by the

company’s investment in fixed assets. Cisco is able to generate $9.52 in sales for

every $1 invested in property, plant, and equipment.



Exercise 10-13

Requirement 1

Cash ................................................................................. 3,000

Accumulated depreciation - tractor (account balance) ....... 26,000

Loss on sale of tractor (difference) .................................... 1,000

Tractor (account balance) ................................................ 30,000

Requirement 2

Cash ................................................................................. 10,000

Accumulated depreciation - tractor (account balance) ....... 26,000

Tractor (account balance) ................................................ 30,000

Gain on sale of tractor (difference) ................................ 6,000

Exercise 10-14

Equipment - new ($200,000 + 60,000) ............................... 260,000

Accumulated depreciation (account balance) ..................... 220,000

Cash ............................................................................. 60,000

Equipment - old (account balance) ................................. 400,000

Gain ($200,000 - 180,000) ............................................... 20,000

Exercise 10-15

Equipment - new ($170,000 + 60,000) ................................ 230,000

Loss ($180,000 - 170,000) ................................................... 10,000

Accumulated depreciation (account balance) ..................... 220,000

Cash ............................................................................. 60,000

Equipment - old (account balance) ................................. 400,000



Exercise 10-16

Requirement 1

Fair value of land + Cash given = Fair value of equipment $150,000 + 10,000 = $160,000

Requirement 2

Equipment ($150,000 + 10,000) .......................................... 160,000

Cash ............................................................................ 10,000

Land (book value).......................................................... 120,000

Gain ($150,000 - 120,000) .............................................. 30,000

Exercise 10-17

Requirement 1

Fair value of land - Cash received = Fair value of equipment $150,000 - 10,000 = $140,000

Requirement 2

Equipment ($150,000 - 10,000) .......................................... 140,000

Cash ................................................................................ 10,000

Land (book value).......................................................... 120,000

Gain ($150,000 - 120,000) .............................................. 30,000



Exercise 10-18

Requirement 1

Fair value of old land + Cash given = Fair value of new land $72,000 + 14,000 = $86,000

Requirement 2

Land–new ($72,000 + 14,000) ............................................ 86,000

Cash ............................................................................. 14,000

Land - old (book value) .................................................. 30,000

Gain ($72,000 – 30,000) .................................................. 42,000

Requirement 3

Land–new ($30,000 + 14,000) ............................................ 44,000

Cash ............................................................................. 14,000

Land - old (book value) .................................................. 30,000



Exercise 10-19 1. To record the purchase of equipment on account.

Equipment ($25,000 x 98%) .............................................. 24,500

Accounts payable ........................................................ 24,500

2. To record the acquisition of equipment in exchange for a note.

Equipment (determined below) ........................................... 24,545

Discount on note payable (difference) .............................. 2,455


PV = $27,000 (.90909* ) = $24,545

* Present value of $1: n=1, i=10% (from Table 2)

3. To record the exchange of old equipment for new equipment.

Equipment - new ($2,500 + 22,000) ................................... 24,500

Loss ($6,000 - 2,500) ......................................................... 3,500

Accumulated depreciation ............................................. 8,000

Cash ............................................................................ 22,000

Equipment - old .......................................................... 14,000

4. To record the acquisition of equipment by the issuance of stock.

Equipment ....................................................................... 24,000

Common stock ............................................................ 24,000



Exercise 10-20 Average accumulated expenditures:

$6,000,000

= $3,000,000

2

Interest capitalized:

$3,000,000

- 1,500,000 x 10% = $150,000

1,500,000 x 7%* = 105,000

$255,000 = interest capitalized

* Weighted-average rate of all other debt:

$2,000,000 x 9% = $180,000

4,000,000 x 6% = 240,000

$6,000,000 $420,000

$420,000

= 7%

$6,000,000

Exercise 10-21 Average accumulated expenditures for 2009:

January 2, 2009 $500,000 x 12/12 = $ 500,000

March 1, 2009 600,000 x 10/12 = 500,000

July 31, 2009 480,000 x 5/12 = 200,000

September 30, 2009 600,000 x 3/12 = 150,000

December 31, 2009 300,000 x 0/12 = - 0 -

$1,350,000


$1,350,000 x 8% = $108,000



Exercise 10-22 Average accumulated expenditures for 2009:

January 2, 2009 $ 600,000 x 12/12 = $ 600,000

March 31, 2009 1,200,000 x 9/12 = 900,000

June 30, 2009 800,000 x 6/12 = 400,000

September 30, 2009 600,000 x 3/12 = 150,000

December 31, 2009 400,000 x 0/12 = - 0 -

$2,050,000


$2,050,000

- 1,500,000 x 8.0% = $120,000

550,000 x 10.5%* = 57,750

$177,750 = interest capitalized


$5,000,000 x 12% = $600,000

3,000,000 x 8% = 240,000

$8,000,000 $840,000

$840,000

= 10.5%

$8,000,000

Exercise 10-23 IAS No. 23, as originally issued, allowed a company to choose between (1)

capitalization and (2) immediate expensing of interest incurred during the construction

period. In 2007, IAS No. 23 was revised to require capitalization of interest. So,

Highlands Company must capitalize $177,750 in interest as with U.S. GAAP.



Exercise 10-24 To expense R&D costs incorrectly capitalized.

Research and development expense (below) .................... 3,180,000

Patent ........................................................................... 3,180,000

Research and development expenditures:

Basic research to develop the technology $2,000,000

Engineering design work 680,000

Development of a prototype 300,000

Testing and modification of the prototype 200,000

Total $3,180,000

To capitalize cost of equipment incorrectly capitalized as patent.

Equipment ....................................................................... 60,000

Patent ........................................................................... 60,000

To record depreciation on equipment used in R&D projects.

Research and development expense ................................ 10,000

Accumulated depreciation - equipment ...................... 10,000



Exercise 10-25 Research and development expense:

Salaries and wages for lab research $ 400,000

Materials used in R&D projects 200,000

Fees paid to outsiders for R&D projects 320,000

Depreciation on R&D equipment 120,000

Total $1,040,000

The patent filing and legal costs are capitalized as the cost of the patent. The

salaries, wages, and supplies for R&D performed for another company are included as

inventory and expensed as cost of goods sold using either the completed contract or

percentage-of-completion method.



Exercise 10-26

List A List B

f 1. Depreciation a. Exclusive right to display a word, a symbol, or an

emblem.

d 2. Depletion b. Exclusive right to benefit from a creative work.

i 3. Amortization c. Operational assets that represent rights.

g 4. Average accumulated d. The allocation of cost for natural resources.

expenditures

h 5. Revenue - donation of asset e. Purchase price less fair value of net

identifiable assets.

j 6. Nonmonetary exchange f. The allocation of cost for plant and equipment.

k 7. Natural resources g. Approximation of average amount of debt if all

construction funds were borrowed.

c 8. Intangible assets h. Account credited when assets are donated to a

corporation.

b 9. Copyright i. The allocation of cost for intangible assets.

a 10. Trademark j. Basic principle is to value assets acquired using fair

value of assets given.

e 11. Goodwill k. Wasting assets.



Exercise 10-27

Requirement 1

($ in millions) Research and development expense ............................... 4

Software development costs ........................................... 2

Cash ............................................................................ 6

Requirement 2

(1) Percentage-of-revenue method:

$4,000,000

= 40% x $2,000,000 = $800,000

$10,000,000

(2) Straight-line method:

1/5 or 20 % x $2,000,000 = $400,000.

The percentage-of-revenue method is used since it produces the greater

amortization, $800,000.

Requirement 3

Software development costs $2,000,000

Less: Amortization to date (800,000)

Net $1,200,000



Exercise 10-28

Requirement 1

Oil wells ......................................................................... 450,000

Cash ............................................................................. 450,000

Requirement 2

Oil wells ($50,000 + 60,000 + 80,000) ................................. 190,000

Exploration expense ........................................................ 260,000

Cash ............................................................................. 450,000



CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. d. Simons Company should value the land at $170,500. All expenditures

incurred to purchase land should be part of the capitalized asset. $150,000 +

($150,000 x .07) + $5,000 + $5,000

2. c. Costs attributable to land: $60,000 + $2,000 + $5,000 - $3,000 = $64,000

Costs attributable to building: $8,000 + $350,000 = $358,000

3. d. There are eight payments due, the first one due immediately, and the

remaining seven due each year on December 31. Therefore, the correct

factor to use is the present value of an annuity in advance (annuity due) for 8

periods, or 5.712 x $20,000 = $114,240, the present value at the inception of

the note and therefore the initial value of the machine. Another way to

calculate the answer is to view the annuity as a 7 period ordinary annuity,

with a down payment today of $20,000. This would yield a calculation of

$20,000 + ($20,000 x 4.712) or $114,240.

4. b. The recorded cost of the new asset is equal to the fair value of the asset

given up, $20,000. In this case, there are two new assets acquired, new truck,

$15,000, and cash, $5,000. The gain on the trade is $8,000 (FV old truck

$20,000 - $12,000 book value).

5. c. Dahl Corporation should capitalize the materials, engineering fees, and labor

and electricity for construction and testing: ($20,000 + $5,000 + $3,000 +

$1,000 + $1,000 + $1,000). The labor and electricity to run the machine

should not be capitalized. These should be expensed because they are not

part of the construction costs and were not incurred prior to activating the

asset.



CPA Exam Questions (concluded)

6. b. The interest cost capitalized is the lesser of the formula amount based on

average accumulated expenditures or the actual interest cost incurred. In this

case the formula amount ($40,000) is the smaller amount and should be the

amount capitalized as part of the cost of the building.

7. a. Amortization of capitalized software is the lesser of the amount calculated

using the percentage-of-revenue method and the straight-line method. In

this case, the straight-line percentage is 20% (1/5) and the percentage-of-

revenue method is 30%. Therefore, we amortize 30% of the cost yielding

book value of 70%.

8. d. All of the expenditures are considered research and development.

CMA Exam Questions

1. a. The costs of fixed assets (plant and equipment) are all costs necessary to

acquire these assets and to bring them to the condition and location required

for their intended use. These costs include shipping, installation, pre-use

testing, sales taxes, interest, capitalization, etc. The original cost of the

machinery to be recorded in the books is the sum of the purchase price,

installation, and delivery charges.

2. d. SFAS No. 153, ―Exchanges of Nonmonetary Assets – an amendment of APB

Opinion No. 29‖, states that the basic principle to be followed in these

exchanges is to value the asset received at fair value and to recognize gain or

loss (the difference between the fair value and the book value of the asset

given up). Harper’s used machine has a book value of $64,000 ($162,500

cost - $98,500 accumulated depreciation). The fair value of the used

machine is $80,000 resulting in a gain of $16,000 ($80,000 – 64,000). The

only exceptions to using fair value are (1) when fair value is not

determinable and (2) when the exchange lacks commercial substance.

3. c. The answer is the same as question 2.



Problem 10-1 1. To record the acquisition of land and building.

Land (determined below) ........................................................................ 62,500

Building (determined below) .............................................. 37,500

Cash ............................................................................ 100,000

Asset

Fair Value

Percent of Total

Fair Value

Initial


$100,000)

Land $ 75,000 62.5% $ 62,500

Building 45,000 37.5 37,500

$120,000 100.0% $100,000

2. To record the acquisition of equipment for cash and a note.

Equipment (determined below) ........................................... 37,037



Present value of note payments:

PV = $40,000 (.92593* ) = $37,037

* Present value of $1: n = 1, i=8% (from Table 2)

3. To record the acquisition of a truck by donation.

Truck ............................................................................... 2,500

Revenue - donation of asset ........................................ 2,500

PROBLEMS



Problem 10-1 (concluded)

4. To capitalize organization costs.

Organization cost expense .............................................. 3,000

Cash ............................................................................. 3,000

5. To record the purchase of machinery.

Machinery ($15,000 + 500) ................................................ 15,500

Cash ............................................................................. 15,500

6. To record the acquisition of office equipment by the issuance of common

stock.

Office equipment ............................................................. 5,500

Common stock ............................................................ 5,500

7. To record the acquisition of land in exchange for cash and a note.

Land ................................................................................. 20,000

Cash ............................................................................. 2,000

Note payable ............................................................... 18,000



Problem 10-2

Requirement 1

Blackstone Corporation

LAND ACCOUNT (Site Number 11)

As of September 30, 2010

Acquisition cost $600,000

Real estate broker’s commission 36,000

Legal fees 6,000

Title insurance 18,000

Cost of razing existing building 75,000

Balance, September 30, 2010 $735,000

Requirement 2

Blackstone Corporation

CAPITALIZED COST OF OFFICE BUILDING

As of September 30, 2010

Contract cost $3,000,000

Plans, specifications, and blueprints 12,000

Architects’ fees for design and supervision 95,000

Capitalized interest for 2009:

$900,000 x 14% x 10/12 105,000

Capitalized interest for 2010:

$2,300,000 x 14% x 9/12 241,500

Total capitalized cost, September 30, 2010 $3,453,500



Problem 10-3

Requirement 1

Pell Corporation

ANALYSIS OF CHANGES IN PLANT ASSETS

For the Year Ended December 31, 2009

Balance Balance

12/31/08 Increase Decrease 12/31/09 Land $ 350,000 $438,000 [1] $ 788,000

Land improvements 180,000 180,000

Building 1,500,000 1,500,000

Machinery and

equipment 1,158,000 287,000 [2] $58,000 1,387,000

Automobiles 150,000 19,000 [3] 18,000 151,000

Totals $3,338,000 $744,000 $76,000 $4,006,000

Explanation of Amounts:

[1] Cost of land acquired 11/1/09:

Pell stock exchanged (10,000 shares x $38) $380,000

Legal fees and title insurance 23,000

Razing existing building 35,000

$438,000

[2] Cost of machinery and equipment purchased 1/2/09:

Invoice cost $260,000

Installation cost 27,000

$287,000

[3] Cost recorded for new automobile 12/31/09:

Fair value of trade-in $ 3,750

Cash paid 15,250

$ 19,000




Requirement 2

Pell Corporation

GAIN OR LOSS FROM PLANT ASSET DISPOSALS

For the Year Ended December 31, 2009

Sale of machine on 3/31/09:

Selling price $36,500

Less: Book value of machine ($58,000 - 24,650) (33,350)

Gain on sale of machine $ 3,150

Trade-in of automobile on 12/31/09:

Book value of trade-in ($18,000 - 13,500) $ 4,500

Less: Fair value of trade-in (3,750)

Loss on trade-in $ 750



Problem 10-4

To reclassify various expenditures incorrectly charged to the intangible asset

account.

Organization cost expense .............................................. 7,000

Prepaid insurance ............................................................ 6,000

Copyright ......................................................................... 20,000

Research and development expense ................................ 40,000

Patent ($3,000 + 12,000) ..................................................... 15,000

Franchise ......................................................................... 40,000

Advertising expense ........................................................ 16,000

Intangible asset ............................................................ 144,000

To reclassify amount paid for Stiltz Corp. incorrectly charged to the

intangible asset account.

Receivables ..................................................................... 100,000

Equipment ....................................................................... 350,000

Patent ............................................................................... 150,000

Goodwill (determined below) .............................................. 120,000

Note payable ............................................................... 220,000

Intangible asset ............................................................ 500,000

Calculation of goodwill:

Consideration exchanged $500,000

Less: Fair value of net assets (380,000)

Goodwill $120,000



Problem 10-5

1. To expense R&D costs.

Research and development expense ............................... 12,000

Cash ............................................................................ 12,000

2. To expense legal fees for unsuccessful defense of patent.

Legal fees expense .......................................................... 7,500

Cash ............................................................................ 7,500

3. To capitalize the cost of equipment.

Equipment (cash price)...................................................... 23,000


Cash (amount paid) ........................................................ 6,000


4. To capitalize cost of the sprinkler system.

Building - sprinkler system ............................................ 28,000

Cash ............................................................................ 28,000

5. To capitalize legal fees for successful defense of patent.

Patent .............................................................................. 12,000

Cash ............................................................................ 12,000




6. To record the trade-in of an old machine for a new machine.

Machine - new ($2,000* + 8,000) ....................................... 10,000

Accumulated depreciation - machine ($7,400 - 3,000) ...... 4,400

Loss on trade-in ($3,000 – 2,000*) ..................................... 1,000

Cash ............................................................................. 8,000

Machine - old .............................................................. 7,400

*Fair value of old machine (Fair value of new machine - Cash given):

$10,000 - 8,000 = $2,000



Problem 10-6 Southern Company:

Cash ................................................................................ 140,000

Building - new ($1,400,000 - 140,000) ................................ 1,260,000

Accumulated depreciation - building (account balance) .... 1,200,000

Building - old (account balance) .................................... 2,000,000

Gain ($1,400,000 – 800,000) ........................................... 600,000

Eastern Company:

The fair value of Eastern’s building is $1,260,000 ($1,400,000 fair value of

Southern’s building less $140,000 cash given).

Building - new ($1,260,000 + 140,000) ............................... 1,400,000

Accumulated depreciation - building (account balance) .... 650,000

Cash ............................................................................ 140,000

Building - old (account balance) .................................... 1,600,000

Gain on exchange of buildings ($1,260,000 – 950,000) . 310,000



Problem 10-7

Robers:

Cash ................................................................................. 5,000

New asset ($75,000 - 5,000) ................................................ 70,000

Accumulated depreciation - old asset (account balance) .... 55,000

Old asset (account balance) ............................................. 120,000

Gain on exchange of assets ($75,000 – 65,000) .............. 10,000

Phifer:

New asset ($70,000 + 5,000)............................................... 75,000

Accumulated depreciation - old asset (account balance) .... 63,000

Loss ($77,000 – 70,000) .............................................................. 7,000

Cash ............................................................................. 5,000

Old asset (account balance) ............................................. 140,000



Problem 10-9

Requirement 1

2009:

Expenditures for 2009: January 3, 2009 $1,000,000 x 12/12 = $1,000,000

March 1, 2009 600,000 x 10/12 = 500,000

June 30, 2009 800,000 x 6/12 = 400,000

October 1, 2009 600,000 x 3/12 = 150,000

Accumulated expenditures

(before interest) - $3,000,000

Average accumulated expenditures - $2,050,000


$2,050,000 x 10% = $205,000 = Interest capitalized in 2009

2010: January 1, 2010

($3,000,000 + 205,000) $3,205,000 x 9/9 = $3,205,000

January 31, 2010 270,000 x 8/9 = 240,000

April 30, 2010 585,000 x 5/9 = 325,000

August 31, 2010 900,000 x 1/9 = 100,000


(before interest) - $4,960,000



$3,870,000

- 3,000,000 x 10.0% x 9/12 = $225,000

870,000 x 7.2%* x 9/12 = 46,980

$271,980 = Interest capitalized in 2010


$ 4,000,000 x 6% = $240,000 $720,000

6,000,000 x 8% = 480,000 = 7.2%

$10,000,000 $720,000 $10,000,000




Requirement 2

Accumulated expenditures 9/30/10

before interest capitalization (above) $4,960,000

2010 interest capitalized (above) 271,980


Requirement 3

2009 $3,000,000 x 10% = $ 300,000

4,000,000 x 6% = 240,000

6,000,000 x 8% = 480,000

Total interest incurred 1,020,000

Less: Interest capitalized (205,000)

2009 interest expense $ 815,000

2010 Total interest incurred $1,020,000





Problem 10-10

Requirement 1

2009

Expenditures for 2009 January 3, 2009 1,000,000 x 12/12 = $1,000,000

March 1, 2009 600,000 x 10/12 = 500,000

June 30, 2009 800,000 x 6/12 = 400,000

October 1, 2009 600,000 x 3/12 = 150,000


(before interest) — $3,000,000


Interest capitalized: $2,050,000 x 7.85%* = $160,925 = Interest capitalized in 2009

* Weighted-average rate of all debt:

$ 3,000,000 x 10% = $ 300,000 $1,020,000

4,000,000 x 6% = 240,000 = 7.85% (rounded)

6,000,000 x 8% = 480,000 $13,000,000

$13,000,000 $1,020,000

2010:

January 1, 2010 ($3,000,000 + 160,925) $3,160,925 x 9/9 = $3,160,925

January 31, 2010 270,000 x 8/9 = 240,000

April 30, 2010 585,000 x 5/9 = 325,000

August 31, 2010 900,000 x 1/9 = 100,000


(before interest) — $4,915,925


Interest capitalized: $3,825,925 x 7.85% x 9/12 =$225,251 = Interest capitalized in 2010




Requirement 2

Accumulated expenditures 9/30/10,

before interest capitalization (above) $4,915,925

2010 interest capitalized (above) 225,251


Requirement 3

2009: $3,000,000 x 10% = $ 300,000

4,000,000 x 6% = 240,000

6,000,000 x 8% = 480,000

Total interest incurred 1,020,000



2010: Total interest incurred $1,020,000





Problem 10-11 To capitalize the cost of equipment to be used on future projects incorrectly

charged to R&D expense.

Equipment ....................................................................... 400,000

Research and development expense ........................... 400,000

To record depreciation on equipment used in R&D projects.

$400,000 ÷ 5 years = $80,000

Research and development expense ............................... 80,000

Accumulated depreciation - equipment ...................... 80,000

To capitalize filing and legal fees for patent incorrectly charged to R&D expense.

Patent .............................................................................. 40,000


To reclassify the expenditures made for quality control during commercial

production.

Inventory* ....................................................................... 20,000


*Quality control costs would either be treated as manufacturing overhead and

included in the cost of inventory (as in this journal entry), or expensed in the

period incurred.



Problem 10-12

Requirement 1

Land

Purchase price (determined below) $714,404

Closing costs 20,000

Removal of old building 70,000

Clearing and grading 50,000

$854,404

Purchase price of land:

Cash paid $200,000

Value of note† 514,404

$714,404

† Present value of note payment:

PV = $600,000 (.85734* ) = $514,404


Land improvements

Parking lot and landscaping $285,000

Building

Construction expenditures:

May 30 $1,200,000

July 30 1,500,000

September 1 900,000

October 1 1,800,000

Total expenditures 5,400,000

Interest capitalized (determined below) 94,000





Average accumulated expenditures:

May 31, 2009 $1,200,000 x 5/6 = $ 1,000,000

July 30, 2009 1,500,000 x 3/6 = 750,000

September 1, 2009 900,000 x 2/6 = 300,000

October 1, 2009 1,800,000 x 1/6 = 300,000

$2,350,000


$2,350,000 x 8% x 6/12 = $94,000

Equipment and furniture and fixtures

Initial

Percent of Total Valuation

Fair Value Fair Value % x $600,000

Equipment $455,000 65% $390,000

Furniture & fixtures 245,000 35% 210,000

Totals $700,000 100% $600,000

Initial valuation:

Equipment $390,000

Furniture & fixtures 210,000

Requirement 2

Interest expense:

Note issued to purchase land and building,

$514,404 x 8% x 9/12 = $ 30,864

Construction loan, $3,000,000 x 8% x 8/12 160,000

Long-term note, $2,000,000 x 9% 180,000

Long-term bonds, $4,000,000 x 6% 240,000

Total 610,864

Less: Interest capitalized (determined above) (94,000)

Interest expense $516,864

Documents

Ch 10 Solution