Intermediate Accounting Kieso 16e Test Bank 10.3
BRIEF EXERCISES
BE. 10-131—Plant asset accounting.
During 2017 and 2018, Sawyer Corporation experienced several transactions involving plant assets. A number of errors were made in recording some of these transactions. For each item listed below, indicate the effect of the error (if any) in the blanks provided by using the following codes:
O = Overstate; U = Understate; NE = No Effect
If no error was made, write NE in each of the four columns.
2017 2018
Net Book Net Book
Value of Value of
Plant 2017 Plant 2018
Assets at Net Assets at Net
Transaction 12/31/17 Income 12/31/18 Income
1. The cost of installing a new computer system in 2017 was not recorded in 2017. It was charged to expense in 2018.
2. In 2018 clerical workers were trained to use the new computer system at a cost of $15,000, which was erroneously capital-ized. The cost is to be written off over the expected life of the new computer system.
3. A major overhaul of factory machinery in 2017, which extended its useful life by 5 years, was charged to accumulated depreciation in 2017.
4. Interest cost qualifying for capitalization in 2017 was charged to interest expense in 2017.
5. In 2017 land was bought for an employee parking lot. The $2,000 title search fee was charged to expense in 2017.
6. The cost of moving several manufacturing facilities from metropolitan locations to suburban areas in 2017 was capitalized. The cost was written off over a 10-year period beginning in 2017.
BE. 10-132—Weighted-Average Accumulated Expenditures.
On April 1, Paine Co. began construction of a small building. Payments of $300,000 were made monthly for four months beginning on April 1. The building was completed and ready for occupancy on August 1. For the purpose of determining the amount of interest cost to be capitalized, calculate the weighted-average accumulated expenditures on the building by completing the schedule below:
Date Expenditures Capitalization Period Weighted-Ave. Accum. Expend.
BE. 10-133—Capitalization of interest.
On March 1, Mocl Co. began construction of a small building. The following expenditures were incurred for construction:
March 1 $ 300,000 April 1 $ 296,000
May 1 720,000 June 1 1,080,000
July 1 400,000
The building was completed and occupied on July 1. To help pay for construction $200,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $2,000,000, 10% note issued two years ago.
Instructions
(a) Calculate the weighted-average accumulated expenditures.
(b) Calculate avoidable interest.
EXERCISES
Ex. 10-134—Nonmonetary exchange.
A machine cost $300,000, has annual depreciation expense of $60,000, and has accumulated depreciation of $150,000 on December 31, 2017. On April 1, 2018, when the machine has a fair value of $120,000, it is exchanged for a similar machine with a fair value of $360,000 and the proper amount of cash is paid. The exchange lacked commercial substance.
Instructions
Prepare all entries that are necessary at April 1, 2018.
Ex. 10-135—Nonmonetary exchange.
Equipment that cost $600,000 and has accumulated depreciation of $475,000 is exchanged for equipment with a fair value of $240,000 and $60,000 cash is received. The exchange lacked commercial substance.
Instructions
(a) Show the calculation of the gain to be recognized from the exchange.
(b) Prepare the entry for the exchange. Show a check of the amount recorded for the new equipment.
Ex. 10-136—Donated assets.
Cheng Company has recently decided to accept a proposal from the City of Bel Aire that publicly owned property with a large warehouse located on it will be donated to Cheng if Cheng will build a branch plant in Bel Aire. The appraised value of the property is $500,000 and of the warehouse is $1,000,000.
Instructions
Prepare the entry by Cheng for the receipt of the properties.
Ex. 10-137—Capitalizing vs. Expensing.
Consider each of the items below. Place the proper letter in the blank space provided to indicate the nature of the account or accounts to be debited when recording each transaction using the preferred accounting treatment. Prepayments should be recorded in balance sheet accounts. Disregard income tax considerations unless instructed otherwise.
a. asset(s) only
b. accumulated amortization, depletion, or depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts
1. A motor in one of North Company’s trucks was overhauled at a cost of $600. It is expected that this will extend the life of the truck for two years.
2. Machinery which had originally cost $130,000 was rearranged at a cost of $450, including installation, in order to improve production.
3. Orlando Company recently purchased land and two buildings for a total cost of $35,000, and entered the purchase on the books. The $1,200 cost of razing the smaller building, which has an appraisal value of $6,200, is recorded.
4. Jantzen Company traded its old machine with a net book value of $3,000 plus cash of $7,000 for a new one which had a fair market value of $9,000.
5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in unloading and setting up a new $6,000 precision machine in the plant. The wages earned in this five-day period, $480, are recorded.
6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a cost of $13,000. As a result the insurance rate was decreased by 40%.
7. An improvement, which extended the life but not the usefulness of the asset, cost $6,000.
8. The attic of the administration building was finished at a cost of $3,000 to provide an additional office.
9. In March, the Lyon Theatre bought projection equipment on the installment basis. The contract price was $23,610, payable $5,610 down, and $2,250 a month for the next eight months. The cash price for this equipment was $22,530.
10. Lambert Company recorded the first year’s interest on 6% $100,000 ten-year bonds sold a year ago at 94. The bonds were sold in order to finance the construction of a hydroelectric plant. Six months after the sale of the bonds, the construction of the hydroelectric plant was completed and operations were begun. (Only cash interest, and not discount amortization, is to be considered.)
PROBLEMS
Pr. 10-138—Capitalizing acquisition costs.
Gibbs Manufacturing Co. was incorporated on 1/2/17 but was unable to begin manufacturing activities until 8/1/17 because new factory facilities were not completed until that date. The Land and Buildings account at 12/31/17 per the books was as follows:
Date Item Amount
1/31/17 Land and dilapidated building $200,000
2/28/17 Cost of removing building 4,000
4/1/17 Legal fees 6,000
5/1/17 Fire insurance premium payment 5,400
5/1/17 Special tax assessment for streets 4,500
5/1/17 Partial payment of new building construction 210,000
8/1/17 Final payment on building construction 210,000
8/1/17 General expenses 30,000
12/31/17 Asset write-up 75,000
$744,900
Additional information:
1. To acquire the land and building on 1/31/17, the company paid $100,000 cash and 1,000 shares of its common stock (par value = $100/share) which is very actively traded and had a fair value per share of $180.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
$6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2017.
5. General expenses covered the following for the period 1/2/17 to 8/1/17.
President's salary $20,000
Plant superintendent covering supervision of new building 10,000
$30,000
6. Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/17 for a separate land account and a separate buildings account. Use separate T-accounts (one for land and one for buildings) labeling all the relevant amounts and disclosing all computations.
Pr. 10-139—Capitalization of interest.
During 2017, Barden Building Company constructed various assets at a total cost of $14,700,000. The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2017 were $9,800,000. The company had the following debt outstanding at December 31, 2017:
1. 10%, 5-year note to finance construction of various assets,
dated January 1, 2017, with interest payable annually on January 1 $6,300,000
2. 12%, ten-year bonds issued at par on December 31, 2011, with interest
payable annually on December 31 7,000,000
3. 9%, 3-year note payable, dated January 1, 2016, with interest payable
annually on January 1 3,500,000
Instructions
Compute the amounts of each of the following (show computations).
1. Avoidable interest.
2. Total interest to be capitalized during 2017.
Pr. 10-140—Capitalization of interest.
Early in 2017, Dobbs Corporation engaged Kiner, Inc. to design and construct a complete modernization of Dobbs's manufacturing facility. Construction was begun on June 1, 2017 and was completed on December 31, 2017. Dobbs made the following payments to Kiner, Inc. during 2017:
Date Payment
June 1, 2017 $2,000,000
August 31, 2017 3,000,000
December 31, 2017 2,500,000
In order to help finance the construction, Dobbs issued the following during 2017:
1. $1,700,000 of 10-year, 9% bonds payable, issued at par on May 31, 2017, with interest payable annually on May 31.
2. 300,000 shares of no-par common stock, issued at $10 per share on October 1, 2017.
In addition to the 9% bonds payable, the only debt outstanding during 2017 was a $425,000, 12% note payable dated January 1, 2013 and due January 1, 2023, with interest payable annually on January 1.
Instructions
Compute the amounts of each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of interest cost.
2. Avoidable interest incurred during 2017.
3. Total amount of interest cost to be capitalized during 2017.
Pr. 10-141—Asset acquisition.
Ford Inc. plans to acquire an additional machine on January 1, 2017 to meet the growing demand for its product. Stever Company offers to provide the machine to Ford using either of the options listed below (each option gives Ford exactly the same machine and gives Stever Company approximately the same net present value cash equivalent at 10%).
Option 1 — Cash purchase $3,200,000.
Option 2 — Installment purchase requiring 15 annual payments of $420,716 due December 31 each year.
The expected economic life of this machine to Ford is 15 years. Salvage value at that time is estimated to be $200,000. Straight-line depreciation is used. Interest expense under Option 2 is computed using the effective interest method.
Instructions
Based upon current generally accepted accounting principles, state how, if at all, the book value of the machine and the liability should appear on the December 31, 2017 balance sheet of Ford Inc., for each option. Present your answer on an answer sheet in the following format. If an item should not appear in the balance sheet, write "not shown" opposite the option.
Assets Liabilities
Account Name Amount Account Name Amount
Option 1
Option 2
Pr. 10-142—Nonmonetary exchanges.
Moore Corporation follows a policy of a 10% depreciation charge per year on all machinery and a 5% depreciation charge per year on buildings. The following transactions occurred in 2018:
March 31, 2018— Negotiations which began in 2017 were completed and a building purchased 1/1/09 (depreciation has been properly charged through December 31, 2017) at a cost of $9,600,000 with a fair value of $6,000,000 was exchanged for a second building which also had a fair value of $6,000,000. The exchange had no commercial substance. Both parcels of land on which the buildings were located were equal in value, and had a fair value equal to book value.
June 30, 2018— Machinery with a cost of $1,080,000 and accumulated depreciation through January 1 of $810,000 was exchanged with $675,000 cash for a parcel of land with a fair value of $1,040,000. The exchange had commercial substance.
Instructions
Prepare all appropriate journal entries for Moore Corporation for the above dates.
Pr. 10-143—Nonmonetary exchange.
Rogers Co. had a sheet metal cutter that cost $240,000 on January 5, 2013. This old cutter had an estimated life of ten years and a salvage value of $40,000. On April 3, 2018, the old cutter is exchanged for a new cutter with a fair value of $120,000. The exchange lacked commercial substance. Rogers also received $30,000 cash. Assume that the last fiscal period ended on December 31, 2017, and that straight-line depreciation is used.
Instructions
(a) Show the calculation of the amount of the gain or loss to be recognized by Rogers Co.
(b) Prepare all entries that are necessary on April 3, 2018. Show a check of the amount recorded for the new cutter.
Pr. 10-144—Nonmonetary exchange.
Layne Co. has a machine that cost $850,000 on March 20, 2014. This old machine had an estimated life of ten years and a salvage value of $50,000. On December 23, 2018, the old machine is exchanged for a new machine with a fair value of $540,000. The exchange lacked commercial substance. Layne also received $60,000 cash. Assume that the last fiscal period ended on December 31, 2017, and that straight-line depreciation is used.
Instructions
(a) Show the calculation of the amount of gain or loss to be recognized by Layne Co. from the exchange.
(b) Prepare all entries that are necessary on December 23, 2015. Show a check of the amount recorded for the new machine.
Pr. 10-145—Nonmonetary exchange.
Hodge Co. exchanged Building 24 which has an appraised value of $6,400,000, a cost of $10,120,000, and accumulated depreciation of $4,800,000 for Building M belonging to Fine Co. Building M has an appraised value of $6,016,000, a cost of $12,040,000, and accumulated depreciation of $6,336,000. The correct amount of cash was also paid. Assume depreciation has already been updated.
Instructions
Prepare the entries on both companies' books assuming the exchange had no commercial substance. Show a check of the amount recorded for Building M on Hodge's books. (Round to the nearest dollar.)
Pr. 10-146—Nonmonetary exchange.
Beeman Company exchanged machinery with an appraised value of $4,680,000, a recorded cost of $7,200,000 and accumulated depreciation of $3,600,000 with Lacey Corporation for machinery Lacey owns. The machinery has an appraised value of $4,520,000, a recorded cost of $8,640,000, and accumulated depreciation of $4,752,000. Lacey also gave Beeman $160,000 in the exchange. Assume depreciation has already been updated.
Instructions
(a) Prepare the entries on both companies' books assuming that the exchange had commercial substance. (Round all computations to the nearest dollar.)
(b) Prepare the entries on both companies' books assuming that the exchange lacked commercial substance. (Round all computations to the nearest dollar.)
