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 |
|
|
|
Gain (on disposal |
|
|
|
|
|
|
|
**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 |
|
|
|
|
||
|
|
|
|
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. |
|
|