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EXERCISES

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

© The McGraw-Hill Companies, Inc., 2009


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

Initial
Percent of Total Valuation
Fair Value (Percent x
Asset Fair Value $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

© The McGraw-Hill Companies, Inc., 2009


10-2 Intermediate Accounting, 5/e
Exercise 10-3 (concluded)

Requirement 2

Cost of land:
Purchase price $4,000,000
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-3
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

© The McGraw-Hill Companies, Inc., 2009


10-4 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-5
Exercise 10-8

Initial
Percent of Total Valuation
Fair Value (Percent x
Asset Fair Value $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

© The McGraw-Hill Companies, Inc., 2009


10-6 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-7
Exercise 10-10
Land:
Purchase price $1,200,000
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


* Present value of $1: n = 1, i = 7% (from Table 2)

Prepaid insurance $24,000

© The McGraw-Hill Companies, Inc., 2009


10-8 Intermediate Accounting, 5/e
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.

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-9
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

© The McGraw-Hill Companies, Inc., 2009


10-10 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-11
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

© The McGraw-Hill Companies, Inc., 2009


10-12 Intermediate Accounting, 5/e
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
Note payable (face amount) ........................................... 27,000

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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-13
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

Interest capitalized:

$1,350,000 x 8% = $108,000
© The McGraw-Hill Companies, Inc., 2009
10-14 Intermediate Accounting, 5/e
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

Interest capitalized:

$2,050,000
- 1,500,000 x 8.0% = $120,000
550,000 x 10.5%* = 57,750
$177,750 = interest capitalized

* Weighted-average rate of all other debt:

$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.

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-15
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

© The McGraw-Hill Companies, Inc., 2009


10-16 Intermediate Accounting, 5/e
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.

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-17
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.

© The McGraw-Hill Companies, Inc., 2009


10-18 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-19
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

© The McGraw-Hill Companies, Inc., 2009


10-20 Intermediate Accounting, 5/e
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.

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-21
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.

© The McGraw-Hill Companies, Inc., 2009


10-22 Intermediate Accounting, 5/e
PROBLEMS
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

Initial
Percent of Total Valuation
Fair Value (Percent x
Asset Fair Value $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


Discount on note payable (difference) .............................. 2,963
Note payable (face amount) ........................................... 40,000

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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-23
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

© The McGraw-Hill Companies, Inc., 2009


10-24 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-25
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

© The McGraw-Hill Companies, Inc., 2009


10-26 Intermediate Accounting, 5/e
Problem 10-3 (concluded)
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-27
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

© The McGraw-Hill Companies, Inc., 2009


10-28 Intermediate Accounting, 5/e
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


Discount on note payable (difference) .............................. 1,000
Cash (amount paid) ........................................................ 6,000
Note payable (face amount) ........................................... 18,000

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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-29
Problem 10-5 (concluded)
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

© The McGraw-Hill Companies, Inc., 2009


10-30 Intermediate Accounting, 5/e
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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-31
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

© The McGraw-Hill Companies, Inc., 2009


10-32 Intermediate Accounting, 5/e
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

Interest capitalized:
$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
Accumulated expenditures
(before interest) - $4,960,000
Average accumulated expenditures - $3,870,000
Interest capitalized:
$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

* Weighted-average rate of all other debt:


$ 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
© The McGraw-Hill Companies, Inc., 2009
Solutions Manual, Vol.1, Chapter 10 10-33
Problem 10-9 (concluded)
Requirement 2
Accumulated expenditures 9/30/10
before interest capitalization (above) $4,960,000
2010 interest capitalized (above) 271,980
Total cost of building $5,231,980

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
Less: Interest capitalized (271,980)
2010 interest expense $ 748,020

© The McGraw-Hill Companies, Inc., 2009


10-34 Intermediate Accounting, 5/e
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

Accumulated expenditures
(before interest) — $3,000,000
Average accumulated expenditures - $2,050,000

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

Accumulated expenditures
(before interest) — $4,915,925
Average accumulated expenditures - $3,825,925

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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-35
Problem 10-10 (concluded)
Requirement 2
Accumulated expenditures 9/30/10,
before interest capitalization (above) $4,915,925
2010 interest capitalized (above) 225,251
Total cost of building $5,141,176

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 (160,925)
2009 interest expense $ 859,075

2010:
Total interest incurred $1,020,000
Less: Interest capitalized (225,251)
2010 interest expense $ 794,749

© The McGraw-Hill Companies, Inc., 2009


10-36 Intermediate Accounting, 5/e
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


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

To reclassify the expenditures made for quality control during commercial


production.

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


Research and development expense ........................... 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.

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-37
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


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

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
Total cost of building $5,494,000

© The McGraw-Hill Companies, Inc., 2009


10-38 Intermediate Accounting, 5/e
Problem 10-12 (concluded)

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

Interest capitalized:
$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

© The McGraw-Hill Companies, Inc., 2009


Solutions Manual, Vol.1, Chapter 10 10-39