10 Acquisition and Disposition of Property, Plant, and Equipment EXERCISES 10.1
EXERCISES
E10-1 (L01) (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.
(a) Money borrowed to pay building contractor (signed a note) $(275,000)
(b) Payment for construction from note proceeds 275,000
(c) Cost of land fill and clearing 8,000
(d) Delinquent real estate taxes on property assumed by purchaser 7,000
(e) Premium on 6-month insurance policy during construction 6,000
(f) Refund of 1-month insurance premium because construction completed early (1,000)
(g) Architect’s fee on building 22,000
(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) 250,000
(i) Commission fee paid to real estate agency 9,000
(j) Installation of fences around property 4,000
(k) Cost of razing and removing building 11,000
(l) Proceeds from salvage of demolished building (5,000)
(m) Interest paid during construction on money borrowed for construction 13,000
(n) Cost of parking lots and driveways 19,000
(o) Cost of trees and shrubbery planted (permanent in nature) 14,000
(p) Excavation costs for new building 3,000
Instructions
Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.
E10-2 (L01) EXCEL (Acquisition Costs of Realty) Martin Buber Co. purchased land as a factory site for $400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months.
The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid $2,200 to an engineering firm for a land survey, and $68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $1,500, and a liability insurance premium paid during construction was $900. The contractor’s charge for construction was $2,740,000. The company paid the contractor in two installments: $1,200,000 at the end of 3 months and $1,540,000 upon completion. Interest costs of $170,000 were incurred to finance the construction.
Instructions
Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.
E10-3 (L01) EXCEL (Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below.
1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.
2. Truck #2 has a list price of $16,000 and is acquired for a down payment of $2,000 cash and a zero-interest-bearing note with a face amount of $14,000. The note is due April 1, 2018. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for $15,200. Clarkson uses a perpetual inventory system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation.
The stock has a par value per share of $10 and a market price of $13 per share.
Instructions
Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.
E10-4 (L01,2) (Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017…
Instructions
Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.
E10-5 (L01,3) (Treatment of Various Costs) Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment…
Instructions
Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.
E10-6 (L02,4) (Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.
1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of $700,000. At the time of purchase, Torres’s assets had the following book and appraisal values…
2. Harry Enterprises purchased store equipment by making a $2,000 cash down payment and signing a 1-year, $23,000, 10% note payable. The purchase was recorded as follows...
Purchase Discounts 400
4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $27,000. The company made no entry to record the land because it had no cost basis.
5. Zimmerman Company built a warehouse for $600,000. It could have purchased the building for $740,000. The controller made the following entry...
Instructions
Prepare the entry that should have been made at the date of each acquisition.
E10-7 (L03) (Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period…
Instructions
(Carry all computations to two decimal places.)
(a) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.
(b) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
E10-8 (L03) (Capitalization of Interest) On December 31, 2016, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building:…
Instructions
(a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2017.
E10-9 (L03) (Capitalization of Interest) On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2017, is a $30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.
Instructions
(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)
(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.
(1) July 31, 2017.
(2) November 1, 2017.
(3) December 31, 2017.
E10-10 (L03) (Capitalization of Interest) The following three situations involve the capitalization of interest.
Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed $4,000,000 payable in 10 annual installments of $400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling $1,500,000 under the contract; the weighted average amount of accumulated expenditures was $800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $250,000.
Instructions
What amount should Oksana Baiul report as capitalized interest at December 31, 2017?
Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities...
Instructions
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed $10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled $7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $650,000 for the year.
Instructions
How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2018?
(CPA adapted)
E10-11 (L01,4) (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)
(a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
(b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade. (The exchange has commercial substance.)
(c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.
Instructions
Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.
E10-12 (L01,2,4) (Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.
(a) The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be $81,000.
(b) 13,000 shares of common stock with a par value of $50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of $810,000, of which $180,000 has been allocated to land and $630,000 to buildings.
The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at $65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at $58 per share.
(c) No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed…
Instructions
Prepare journal entries on the books of Duffner Company to record these transactions.
E10-13 (L01,4) (Entries for Acquisition of Assets) Presented below is information related to Zonker Company.
1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:…
Instructions
Prepare entries on the books of Zonker Company for these transactions.
E10-14 (L04) (Purchase of Equipment with Zero-Interest-Bearing Debt) Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note.
Instructions
(Round to nearest dollar in all computations.)
(a) Prepare the journal entry(ies) at the date of purchase.
(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.
(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)
E10-15 (L04) (Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.
Instructions
(Round to two decimal places.)
(a) Prepare the journal entry(ies) at the date of purchase.
(b) Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
(c) Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).
E10-16 (L03,4) GROUPWORK (Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year.
Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following information was gathered.
…
Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note.
The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900.
Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows…
Asset 5: Equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market price of $11 per share.
Construction of Building: A building was constructed on land purchased last year at a cost of $150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows…
Instructions
Record the acquisition of each of these assets.
