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EXERCISE 10-3

 

1.

Truck #1...................................................................................

13,900.00

 

 

            Cash..............................................................................

 

13,900.00

 

 

 

 

2.

Truck #2...................................................................................

14,727.26*

 

 

Discount on Notes Payable...................................................

1,272.74

 

 

            Cash..............................................................................

 

2,000.00

 

            Notes Payable.............................................................

 

14,000.00

 

               *PV of $14,000 @ 10% for 1 year =

 

 

 

               $14,000 X .90909 = $12,727.26

 

 

 

               $12,727.26 + $2,000.00 = $14,727.26

 

 

 

 

 

 

3.

Truck #3...................................................................................

15,200.00

 

 

Cost of Goods Sold................................................................

12,000.00

 

 

            Inventory......................................................................

 

12,000.00

 

            Sales.............................................................................

 

15,200.00

 

 

 

 

 

[Note to instructor: The selling (retail) price of the computer system appears to be a better gauge of the fair value of the consideration given than is the list price of the truck as a gauge of the fair value of the consideration received (truck). Vehicles are very often sold at a price below the list price.]

 

 

 

 

4.

Truck #4...................................................................................

13,000.00

 

 

            Common Stock............................................................

 

10,000.00

 

            Paid-in Capital in Excess of Par................................

 

3,000.00

 

               (1,000 shares X $13 = $13,000)

 

 

                       

E10-4

Purchase

            Cash paid for equipment, including sales tax of $5,000

$105,000

            Freight and insurance while in transit

2,000

            Cost of moving equipment into place at factory

3,100

            Wage cost for technicians to test equipment

4,000

            Special plumbing fixtures required for new equipment

      8,000

            Total cost

$122,100

 

The insurance premium paid during the first year of operation of this equipment should be reported as insurance expense, and not be capital­ized. Repair cost incurred in the first year of operations related to this equipment should be reported as repair and maintenance expense, and not be capitalized. Both these costs relate to periods subsequent to purchase.

Construction

            Material and purchased parts ($200,000 X .98)

$196,000

            Labor costs

190,000

            Overhead costs

50,000

            Cost of installing equipment

      4,400

            Total cost

$440,400

 

Note that the cost of material and purchased parts is reduced by the amount of cash discount not taken because the equipment should be reported at its cash equivalent price. The imputed interest on funds used during construction related to stock financing should not be capitalized or expensed. This item is an opportunity cost that is not reported.

 

Profit on self-construction should not be reported. Profit should only be reported when the asset is sold.

 

EXERCISE 10-5

 

Land

 

Buildings

 

M & E

 

Other

Abstract fees

$       520

 

 

 

 

 

 

 

Architect’s fees

 

 

$    2,800

 

 

 

 

 

Cash paid for land

 

 

 

 

 

 

 

 

   and old building

    87,000

 

 

 

 

 

 

 

Removal of old building

 

 

 

 

 

 

 

 

   ($20,000 – $5,500)

    14,500

 

 

 

 

 

 

 

Surveying before construction

 

 

         370

 

 

 

 

 

Interest on loans during

 

 

 

 

 

 

 

 

   construction

 

 

      7,400

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Excavation before construction

 

 

    19,000

 

 

 

 

 

Machinery purchased

 

 

 

 

$53,900

 

$1,100

—Misc. expense

Freight on machinery

 

 

 

 

    1,340

 

 

 (Discount Lost)

Storage charges caused by

 

 

 

 

 

 

 

 

   noncompletion of building

 

 

 

 

 

 

  2,180

—Misc. expense

 

 

 

 

 

 

 

 

 (Loss)

New building

 

 

  485,000

 

 

 

 

 

Assessment by city

      1,600

 

 

 

 

 

 

 

Hauling charges—machinery

 

 

 

 

 

 

    620

—Misc. expense

Installation—machinery

 

 

 

 

    2,000

 

 

 (Loss)

Landscaping

      5,400

 

_______

 

______

 

_____

 

 

$109,020

 

$514,570

 

$57,240

 

$3,900

 

EXERCISE 10-11

(a)

Equipment................................................................................

10,000

 

 

            Accounts Payable........................................................

 

10,000

 

 

 

 

 

Accounts Payable....................................................................

10,000

 

 

            Equipment ($10,000 X .02)..........................................

 

200

 

            Cash..............................................................................

 

9,800

(b)

Equipment (new).....................................................................

9,900*

 

 

Loss on Disposal of Equipment............................................

1,600**

 

 

Accumulated Depreciation....................................................

6,000

 

 

            Accounts Payable........................................................

 

9,500

 

            Equipment (old)...........................................................

 

8,000

 

**Cost

$8,000

   Accumulated Depreciation

  6,000

   Book value

2,000

   Fair market value

     400

   Loss

$1,600

 

 

*Cost ($9,500 + $400)

$9,900

 

 

Accounts Payable....................................................................

9,500

 

 

            Cash..............................................................................

 

9,500

(c)

Equipment ($10,800 X .91743)................................................

9,908

 

 

Discount on Note Payable.....................................................

892

 

 

   ($10,800 – $9,908)

 

 

 

            Note Payable...............................................................

 

10,800

 

 

 

 

 

Interest Expense....................................................................

892

 

 

Note Payable...........................................................................

10,800

 

 

            Discount on Note Payable.........................................

 

892

 

            Cash..............................................................................

 

10,800

 

EXERCISE 10-18

 

(a)

Assets Are Considered Similar in Nature:

 

 

 

Depreciation Expense...........................................................

700

 

 

            Accumulated Depreciation—Melter.........................

 

700

 

            ($11,200 – $700 = $10,500;

 

 

 

            $10,500 ¸ 5 = $2,100;

 

 

 

            $2,100 X 4/12 = $700)

 

 

 

 

 

 

 

Melter (New)............................................................................

15,200**

 

 

Accumulated Depreciation—Melter.....................................

7,000

 

 

            Gain on Disposal of Plant Assets.............................

 

1,000*

 

            Melter (Old).................................................................

 

11,200

 

            Cash..............................................................................

 

10,000

 

  *Cost of old asset

$11,200

 

 

   Accum. depr.

   (7,000)

($6,300 + $700)

   Book value

4,200

 

 

   Fair market value
     of old asset


   (5,200
)

 

   Gain (on disposal
     of plant asset)


$  1,000

 

 

 

 

 

 

**Cash paid

$10,000

 

 

   FMV of old melter

   5,200

 

  Cost of new melter

$15,200

 

 

 

Gain is not deferred because boot is more than 25% of the transaction which makes the entire transaction monetary in nature.

 

(b)

Assets Are Considered Dissimilar in Nature:

 

 

 

 

Depreciation Expense...........................................................

700

 

 

 

            Accumulated Depreciation—Melter.........................

 

700

 

 

 

 

 

 

 

Melter (New)............................................................................

15,200**

 

 

 

Accumulated Depreciation—Melter.....................................

7,000

 

 

 

            Gain on Disposal of Plant Assets.............................

 

1,000

 

 

            Melter (Old).................................................................

 

11,200

 

 

            Cash..............................................................................

 

10,000

 

 

**Cash paid

$10,000

 

 

 

   FMV of old asset

   (5,200)

 

 

  Cost of new asset

$15,200

 

 

 

Note that the entries are the same for both (1) and (2).

 

EXERCISE 10-22

1/30

Accumulated Depreciation—Buildings..............................

112,200*

 

 

Loss on Disposal of Plant Assets........................................

24,900**

 

 

            Buildings....................................................................

 

132,000

 

            Cash............................................................................

 

5,100

 

 

 

 

 

*(5% X $132,000 = $6,600; $6,600 X 17 = $112,200)

 

 

**($132,000 – $112,200) + $5,100

 

 

 

3/10

Cash ($2,900 – $300)..............................................................

2,600

 

 

 

Accumulated Depreciation—Machinery.............................

11,200*

 

 

 

Loss on Disposal of Plant Assets........................................

2,200**

 

 

 

            Machinery...................................................................

 

16,000

 

 

 

 

 

 

 

*(70% X $16,000 = $11,200)

 

 

 

**($16,000 – $11,200) + $300 – $2,900

 

 

 

 

 

 

 

 

3/20

Machinery (new)....................................................................

385

 

 

 

            Cash............................................................................

 

385

 

 

 

 

 

 

5/18

Machinery (new)....................................................................

5,500

 

 

 

Accumulated Depreciation—Machinery.............................

2,100*

 

 

Loss on Disposal of Plant Assets........................................

1,400**

 

 

 

            Machinery (old)..........................................................

 

3,500

 

 

            Cash............................................................................

 

5,500

 

 

*(60% X $3,500 = $2,100)

 

 

 

 

**($3,500 – $2,100)

 

 

 

 

 

 

 

 

6/23

Building Maintenance and Repairs Expense....................

6,900

 

 

 

            Cash............................................................................

 

6,900

 

 

EXERCISE 10-24

(a)

Depreciation Expense (8/12 X $60,000)..............................

40,000

 

 

            Accumulated Depreciation—Machine....................

 

40,000

 

 

 

 

 

Loss on Disposal of Machine..............................................

470,000

 

 

   ($1,300,000 – $400,000) – $430,000

 

 

 

Cash                                                                                         .....................................................................................

430,000

 

 

Accumulated Depreciation—Machine................................

400,000

 

 

   ($360,000 + $30,000)

 

 

 

            Machine......................................................................

 

1,300,000

 

 

 

 

(b)

Depreciation Expense (3/12 X $60,000)..............................

15,000

 

 

            Accumulated Depreciation—Machine....................

 

15,000

 

 

 

 

 

Cash                                                                                         .....................................................................................

1,040,000

 

 

Accumulated Depreciation—Machine................................

375,000

 

 

   ($360,000 + $15,000)

 

 

 

            Machine......................................................................

 

1,300,000

 

            Gain on Sale of Machine..........................................

 

115,000*

 

            *$1,040,000 – ($1,300,000 – $375,000)

 

 

 

 (c)

Depreciation Expense (7/12 X $60,000)..............................

35,000

 

 

            Accumulated Depreciation—Machine....................

 

35,000

 

 

 

 

 

Contribution Expense..........................................................

1,100,000

 

 

Accumulated Depreciation—Machine................................

395,000

 

 

   ($360,000 + $35,000)

 

 

 

            Machine......................................................................

 

1,300,000

 

            Gain on Disposal of Machine...................................

 

195,000*

 

               *$1,100,000 – ($1,300,000 – $395,000)

 

 

 

 

 

PROBLEM 10-1

 

(a)                                                              Craig Ehlo Company

ANALYSIS OF LAND ACCOUNT

for 2004

 

Balance at January 1, 2004

 

 

$   230,000

 

 

 

 

Land site number 621

 

 

 

Acquisition cost

 

$850,000

 

Commission to real estate agent

 

51,000

 

Clearing costs

$35,000

 

 

Less amounts recovered

  13,000

    22,000

 

            Total land site number 621

 

 

923,000

 

 

 

 

Land site number 622

 

 

 

Land value

 

300,000

 

Building value

 

120,000

 

Demolition cost

 

    41,000

 

            Total land site number 622

 

 

     461,000

Balance at December 31, 2001

 

 

$1,614,000

Craig Ehlo Company

ANALYSIS OF BUILDINGS ACCOUNT

for 2004

 

Balance at January 1, 2004

 

$  890,000

 

Cost of new building constructed

 

 

 

   on land site number 622

 

 

 

            Construction costs

$330,000

 

 

            Excavation fees

38,000

 

 

            Architectural design fees

11,000

 

 

            Building permit fee

      2,500

     381,500

 

Balance at December 31, 2004

 

$1,271,500

 

Craig Ehlo Company

ANALYSIS OF LEASEHOLD IMPROVEMENTS ACCOUNT

for 2004

 

Balance at January 1, 2004

 

$660,000

 

Office space

 

    89,000

 

Balance at December 31, 2004

 

$749,000

 

Craig Ehlo Company

ANALYSIS OF MACHINERY AND EQUIPMENT ACCOUNT

for 2004

 

Balance at January 1, 2004

 

$875,000

 

Cost of the new machines acquired

 

 

 

            Invoice price

$  87,000

 

 

            Freight costs

3,300

 

 

            Unloading charges

      2,400

    92,700

 

Balance at December 31, 2004

 

$967,700

 

(b)               Items in the fact situation which were not used to determine the answer to (a) above are as follows:

 

1.                  Interest imputed on common stock financing is not permitted by FASB Statement No. 34 and thus does not appear in any financial statement.

2.                  Land site number 623, which was acquired for $650,000, should be included in Ehlo’s balance sheet as land held for resale (investment section).

3.                  Royalty payments of $17,500 should be included as a normal operating expense in Ehlo’s income statement.

 

 

PROBLEM 10-4

 

 

The following accounting treatment appears appropriate for these items:
Land—The loss on the condemnation of the land of $9,000 ($40,000 – $31,000) should be reported as an extraordinary item on the income statement. If condemnations are either usual or recurring, then an ordinary or unusual classification is more appropriate. The $35,000 land purchase has no income statement effect.

Building—There is no recognized gain or loss on the demolition of the building. The entire purchase cost ($15,000), decreased by the demolition proceeds ($3,600), is allocated to land.

Warehouse—The gain on the destruction of the warehouse should be reported as an extraordinary item, assuming that it is unusual and infrequent. The gain is computed as follows:

 

            Insurance proceeds

 

$74,000

            Deduct: Cost

$70,000

 

                  Less accumulated depreciation

  11,000

  59,000

            Realized gain

 

$15,000

Some contend that a portion of this gain should be deferred because the proceeds are reinvested in similar assets. We do not believe such an approach should be permitted. Deferral of the gain in this situation is not permitted under GAAP.

Machine—The recognized gain on the transaction would be computed as follows:

            Fair market value of old machine

 

$  7,200

            Deduct: Cost

$  8,000

 

                  Less accumulated depreciation

  (3,200)

    4,800

            Total gain

 

$  2,400

 

            Total gain recognized = $2,400 X

$900

= $300

$900 + $6,300

This gain would probably be reported in other revenues and gains. It might be reported as an unusual item if the company believes that such a situation occurs infrequently. The cost of the new machine would be capitalized at $4,200.

            Fair market value of new machine

 

$6,300

            Less gain deferred

$2,400

 

                  Less accumulated depreciation

    (300)

  2,100

            Total gain

 

$4,200

Furniture—The contribution of the furniture would be reported as a contribution expense of $3,100 with a related gain on disposition of furniture of $950: $3,100 – ($10,000 – $7,850). The contribution expense and the related gain may be netted, if desired.

Automobile—The loss on sale of the automobile of $1,580: [$2,960 – ($8,000 – $3,460)] should probably be reported in the other expenses or losses section. It might be reported as an unusual item if the company believes that such a situation occurs infrequently.

 

 

PROBLEM 10-7

 

 

(a)               Computation of Weighted-Average Accumulated Expenditures

 

Expenditures

 

 

 

 


Date

 


Amount


X

Capitalization Period


=

Weighted-Average Accumulated Expenditures

July 30, 2004

 

$1,200,000

 

10/12

 

$1,000,000

January 30, 2005

 

  1,500,000

 

  4/12

 

     500,000

May 30, 2005

 

  1,300,000

 

      0

 

                0

 

 

$4,000,000

 

 

 

$1,500,000

 

(b)

Weighted-Average Accumulated Expenditures

X

Weighted-Average Interest Rate

=

Avoidable interest

 

$1,500,000

13%*

$195,000

 

Loans Outstanding During Construction Period

 

 

Principal

 

Interest

*14½% five-year note

$2,000,000

 

$290,000

  12% ten-year bond

  3,000,000

 

  360,000

 

$5,000,000

 

$650,000

 

Total interest

=

$650,000

= 13% (weighted-average rate)

Total principal

$5,000,000

 

(b)               (1) and (2)

 

Total actual interest cost

$650,000

 

 

Total interest capitalized

$195,000

 

 

Total interest expensed

$455,000

 

 

PROBLEM 10-9

 

(a)               Exchange of dissimilar assets:

Arna Inc.’s Books

 

Asset B

 

75,000

 

 

Accumulated Depreciation—Asset A

45,000

 

 

            Asset A

 

 

96,000

 

            Gain on Disposal of Plant Assets

 

 

 

               ($60,000 – [$96,000 – $45,000])

 

9,000

 

            Cash

 

15,000

Bontemps Inc.’s Books

 

Cash

 

15,000

 

 

Asset A

 

60,000

 

 

Accumulated Depreciation—Asset B

52,000

 

 

            Asset B

 

 

110,000

 

            Gain on Disposal of Plant Assets

 

 

 

               ($75,000 – [$110,000 – $52,000])

 

17,000

(b)               Exchange of similar assets:

Arna Inc.’s Books

 

Asset B ($75,000 – $9,000)

 

66,000*

 

 

Accumulated Depreciation—Asset A

45,000

 

 

            Asset A

 

 

96,000

 

            Cash

 

15,000

 

*Computation of gain deferred:

 

 

 

 

            Fair value

$60,000

 

 

 

            Book value

 (51,000)

 

 

 

 

            Gain deferred

$  9,000

 

 

 

 

Bontemps Inc.’s Books

 

 

Cash

 

15,000

 

 

Asset A

 

46,400*

 

 

Accumulated Depreciation—Asset B

52,000

 

 

            Asset B

 

 

110,000

 

            Gain on Disposal of Plant Assets

 

3,400**

 

 

Computation of total gain:

 

 

 

 

            Fair value of Asset B

$75,000

 

 

 

            Book value of Asset B

 (58,000)

 

 

 

 

                        Total gain

$17,000

 

 

 

 

*Fair value of asset

$60,000

 

Book value of

$58,000

 

   acquired

 

OR

   Asset B

 

 

Less gain deferred

 

 

Portion of book

 

 

   ($17,000 – $3,400)

  13,600

 

   value sold

 (11,600)

 

Basis of Asset A

$46,400

 

 

$46,400

 

**Gain recognized =

$15,000

X $17,000 = $3,400

$15,000 + $60,000

 

 

PROBLEM 10-10

 

 

(a)

Garrison Books

 

(1)

Equipment

190,000

 

 

 

Accumulated Depreciation—Equipment

60,000

 

 

 

Loss on Disposal of Plant Assets

8,000

 

 

 

            Equipment

 

140,000

 

 

            Cash

 

118,000

 

Keillor Books

 

(2)

Cash

118,000

 

 

 

Equipment Inventory

72,000

 

 

 

            Sales

 

190,000

 

 

Cost of Goods Sold

165,000

 

 

 

            Equipment Inventory

 

165,000

 

(b)       (1)        Garrison Construction should record the same entry as in part (a) above, since the exchange resulted in a loss.

(2)               Keillor should record the same entry as in part (a) above. No gain should be deferred because we are assuming that Garrison is a customer. In addition, because the cash involved is greater than 25% of the value of the exchange, the entire transaction is considered a monetary transaction and a gain is recognized.

 

(c)

 

Garrison Books

 

(1)

Equipment

190,000

 

 

 

Accumulated Depreciation—Equipment

60,000

 

 

 

            Equipment

 

140,000

 

 

            Cash

 

92,000

 

 

            Gain on Disposal of Plant Assets

 

18,000

 

 

               ($98,000 – $80,000)

 

 

 

 

Keillor Books

 

(2)

Cash

92,000

 

 

 

Equipment Inventory

98,000

 

 

 

            Sales

 

190,000

 

 

 

 

 

 

 

Cost of Goods Sold

165,000

 

 

 

            Equipment Inventory

 

165,000

 

(d)

 

Garrison Books

 

(1)

Equipment

190,000

 

 

 

Accumulated Depreciation—Equipment

60,000

 

 

 

            Cash

 

103,000

 

 

            Equipment

 

140,000

 

 

            Gain on Disposal of Plant Assets

 

7,000

 

 

 

 

 

 

 

Note: Cash involved is greater than 25% of the value of the exchange, so the gain is not deferred.

 

 

 

Keillor Books

 

(2)

Cash

103,000

 

 

 

Equipment Inventory

87,000

 

 

 

            Sales

 

190,000

 

 

 

 

 

 

 

Cost of Goods Sold

165,000

 

 

 

            Equipment Inventory

 

165,000

 

 

 

 

 

 

 

Same reasons as cited in (b) (2) above.