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.