Ch 10 Solution

EXERCISES Exercise 10-1 Capitalized cost of land: Purchase price Demolition of old building Less: Sale of materials Legal fees for title investigation Total cost of land

$60,000 $4,000 (2,000)

2,000 2,000 $64,000

Capitalized cost of building: Construction costs Architect's fees Interest on construction loan Total cost of building

$500,000 12,000 5,000 $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) ........................... Accounts payable........................................................ Cash ............................................................................

48,900 47,200 1,700

To record prepaid insurance for the machine. Prepaid insurance............................................................ Cash ............................................................................

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900 900

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Exercise 10-3 Requirement 1 Cost of land and building: Purchase price Title search and insurance Legal fees State transfer fees Total cost

$4,000,000 16,000 5,000 4,000 $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:

Percent of Total Fair Value Asset Land Building

Fair Value $3,300,000 1,100,000 $4,400,000

Assets: Land Building Land improvements: Parking lot Landscaping

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75% 25 100%

Initial Valuation (Percent x $4,025,000)

$3,018,750 1,006,250 $4,025,000

$3,018,750 1,006,250 82,000 40,000

Intermediate Accounting, 5/e

Exercise 10-3 (concluded) Requirement 2 Cost of land: Purchase price Title search and insurance Legal fees State transfer fees Demolition of old building Less: Sale of materials Clearing and grading costs Total cost of land Land improvements: Parking lot Landscaping

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$4,000,000 16,000 5,000 4,000 $250,000 (6,000)

244,000 86,000 $4,355,000 82,000 40,000

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Exercise 10-4 Requirement 1 Cost of copper mine: Mining site Development costs Restoration costs

†

$300,000 x 25% = 400,000 x 40% = 600,000 x 35% =

$1,000,000 600,000 303,939 † $1,903,939 $ 75,000 160,000 210,000 $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) ........................................................... Cash ..........................................................................

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120,000 120,000

Intermediate Accounting, 5/e

Exercise 10-5 Organization cost expense ($12,000 + 3,000) .................... Patent ($20,000 + 2,000) .................................................... Pre-opening expenses .................................................... Furniture ......................................................................... Cash ............................................................................

15,000 22,000 40,000 30,000 107,000

Exercise 10-6 Calculation of goodwill: Consideration exchanged Less fair value of net assets: Assets Less: Liabilities assumed Goodwill

$17,000,000 $23,000,000 (9,500,000)

(13,500,000) $ 3,500,000

Exercise 10-7 Calculation of goodwill: Consideration exchanged Less fair value of net assets: Book value of net assets Plus: Fair value in excess of book value: Property, plant, and equipment Intangible assets Less: Book value in excess of fair value: Receivables Goodwill

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$11,000,000 $7,800,000 1,400,000 1,000,000 (200,000)

10,000,000 $ 1,000,000

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Exercise 10-8

Percent of Total Fair Value Asset Land ................. Building A ....... Building B .......

Fair Value $ 300,000 450,000 250,000 $1,000,000

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30% 45 25 100%

Initial Valuation (Percent x $900,000)

$270,000 405,000 225,000 $900,000

Intermediate Accounting, 5/e

Exercise 10-9 Requirement 1 Tractor ($5,000 cash + 18,783† present value of note)............. Discount on note payable (difference) ............................. Cash ............................................................................ Note payable (face amount) ........................................... †

23,783 6,217 5,000 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%) = 2010: Interest expense [($18,783 + 1,878) x 10%] = Requirement 3 2009: $25,000 – ($6,217 – 1,878) = 2010: $25,000 – ($6,217 – 1,878 – 2,066) =

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$1,878 2,066 $20,661 22,727

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Exercise 10-10 Land: Purchase price Demolition and removal of old building Clearing and grading Closing costs Total cost of land

$1,200,000 80,000 150,000 42,000 $1,472,000

Building: Architect’s fees Construction costs Total cost of building

$ 50,000 3,250,000 $3,300,000

Machinery: Purchase price Freight charges Special platforms and wire installation Cost of trial runs Total cost of machinery Land improvements: Landscaping Sprinkler system

$860,000 32,000 12,000 7,000 $911,000 $45,000 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

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$24,000

Intermediate Accounting, 5/e

Exercise 10-11 To record the acquisition of land in exchange for common stock. February 1, 2009 Land ............................................................................... Common stock (5,000 shares x $18) ...............................

90,000 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.

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Exercise 10-13 Requirement 1 Cash ................................................................................. Accumulated depreciation - tractor (account balance) ....... Loss on sale of tractor (difference) .................................... Tractor (account balance) ................................................

3,000 26,000 1,000 30,000

Requirement 2 Cash ................................................................................. Accumulated depreciation - tractor (account balance) ....... Tractor (account balance)................................................ Gain on sale of tractor (difference)................................

10,000 26,000 30,000 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

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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) ............................................ Cash ............................................................................. Land - old (book value).................................................. Gain ($72,000 – 30,000)..................................................

86,000 14,000 30,000 42,000

Requirement 3 Land–new ($30,000 + 14,000) ............................................ Cash ............................................................................. Land - old (book value)..................................................

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44,000 14,000 30,000

Intermediate Accounting, 5/e

Exercise 10-19 1. To record the purchase of equipment on account. Equipment ($25,000 x 98%) .............................................. Accounts payable........................................................

24,500 24,500

2. To record the acquisition of equipment in exchange for a note. Equipment (determined below)........................................... Discount on note payable (difference) .............................. Note payable (face amount) ...........................................

24,545 2,455 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) ................................... Loss ($6,000 - 2,500) ......................................................... Accumulated depreciation ............................................. Cash ............................................................................ Equipment - old ..........................................................

24,500 3,500 8,000 22,000 14,000

4. To record the acquisition of equipment by the issuance of stock. Equipment ....................................................................... Common stock ............................................................

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24,000 24,000

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Exercise 10-20 Average accumulated expenditures: $6,000,000 = $3,000,000 2 Interest capitalized: $3,000,000 - 1,500,000 1,500,000

x 10% = $150,000 x 7%* = 105,000 $255,000 = interest capitalized

* Weighted-average rate of all other debt: $2,000,000 4,000,000 $6,000,000

x 9% = $180,000 x 6% = 240,000 $420,000

$420,000 = 7% $6,000,000

Exercise 10-21 Average accumulated expenditures for 2009: January 2, 2009 March 1, 2009 July 31, 2009 September 30, 2009 December 31, 2009

$500,000 x 600,000 x 480,000 x 600,000 x 300,000 x

12/12 10/12 5/12 3/12 0/12

= $ 500,000 = 500,000 = 200,000 = 150,000 = -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 March 31, 2009 June 30, 2009 September 30, 2009 December 31, 2009

$ 600,000 1,200,000 800,000 600,000 400,000

x 12/12 x 9/12 x 6/12 x 3/12 x 0/12

= $ 600,000 = 900,000 = 400,000 = 150,000 = -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% = 3,000,000 x 8% = $8,000,000

$600,000 240,000 $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.

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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 Engineering design work Development of a prototype Testing and modification of the prototype Total

$2,000,000 680,000 300,000 200,000 $3,180,000

To capitalize cost of equipment incorrectly capitalized as patent. Equipment ....................................................................... Patent ...........................................................................

60,000 60,000

To record depreciation on equipment used in R&D projects. Research and development expense................................ Accumulated depreciation - equipment ......................

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10,000 10,000

Intermediate Accounting, 5/e

Exercise 10-25 Research and development expense: Salaries and wages for lab research Materials used in R&D projects Fees paid to outsiders for R&D projects Depreciation on R&D equipment Total

$ 400,000 200,000 320,000 120,000 $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.

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Exercise 10-26 List A f d i g h j k c b a e

1. Depreciation

List B a. Exclusive right to display a word, a symbol, or an emblem. b. Exclusive right to benefit from a creative work. c. Operational assets that represent rights. d. The allocation of cost for natural resources.

2. Depletion 3. Amortization 4. Average accumulated expenditures 5. Revenue - donation of asset e. Purchase price less fair value of net identifiable assets. 6. Nonmonetary exchange f. The allocation of cost for plant and equipment. 7. Natural resources g. Approximation of average amount of debt if all construction funds were borrowed. 8. Intangible assets h. Account credited when assets are donated to a corporation. 9. Copyright i. The allocation of cost for intangible assets. 10. Trademark j. Basic principle is to value assets acquired using fair value of assets given. 11. Goodwill k. Wasting assets.

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Intermediate Accounting, 5/e

Exercise 10-27 Requirement 1 ($ in millions)

Research and development expense ............................... Software development costs ........................................... Cash ............................................................................

4 2 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 Less: Amortization to date Net

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$2,000,000 (800,000) $1,200,000

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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

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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.

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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-ofrevenue 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.

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Intermediate Accounting, 5/e

PROBLEMS Problem 10-1 1. To record the acquisition of land and building. Land (determined below) ........................................................................ Building (determined below) .............................................. Cash ............................................................................

Percent of Total Fair Value Asset Land Building

Fair Value $ 75,000 45,000 $120,000

62,500 37,500 100,000 Initial Valuation (Percent x $100,000)

62.5% 37.5 100.0%

$ 62,500 37,500 $100,000

2. To record the acquisition of equipment for cash and a note. Equipment (determined below)........................................... Discount on note payable (difference) .............................. Note payable (face amount) ...........................................

37,037 2,963 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 ............................................................................... Revenue - donation of asset........................................

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2,500 2,500

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Problem 10-1 (concluded) 4. To capitalize organization costs. Organization cost expense .............................................. Cash .............................................................................

3,000 3,000

5. To record the purchase of machinery. Machinery ($15,000 + 500) ................................................ Cash .............................................................................

15,500 15,500

6. To record the acquisition of office equipment by the issuance of common stock. Office equipment............................................................. Common stock ............................................................

5,500 5,500

7. To record the acquisition of land in exchange for cash and a note. Land................................................................................. Cash ............................................................................. Note payable ...............................................................

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20,000 2,000 18,000

Intermediate Accounting, 5/e

Problem 10-2 Requirement 1 Blackstone Corporation LAND ACCOUNT (Site Number 11) As of September 30, 2010 Acquisition cost Real estate broker’s commission Legal fees Title insurance Cost of razing existing building Balance, September 30, 2010

$600,000 36,000 6,000 18,000 75,000 $735,000

Requirement 2 Blackstone Corporation CAPITALIZED COST OF OFFICE BUILDING As of September 30, 2010 Contract cost Plans, specifications, and blueprints Architects’ fees for design and supervision Capitalized interest for 2009: $900,000 x 14% x 10/12 Capitalized interest for 2010: $2,300,000 x 14% x 9/12 Total capitalized cost, September 30, 2010

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$3,000,000 12,000 95,000 105,000 241,500 $3,453,500

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Problem 10-3 Requirement 1 Pell Corporation ANALYSIS OF CHANGES IN PLANT ASSETS For the Year Ended December 31, 2009

Land Land improvements Building Machinery and equipment Automobiles Totals

Balance 12/31/08 $ 350,000 180,000 1,500,000 1,158,000 150,000 $3,338,000

Increase $438,000 [1]

Decrease

287,000 [2] 19,000 [3] $744,000

Explanation of Amounts: [1] Cost of land acquired 11/1/09: Pell stock exchanged (10,000 shares x $38) Legal fees and title insurance Razing existing building [2]

[3]

Cost of machinery and equipment purchased 1/2/09: Invoice cost Installation cost Cost recorded for new automobile 12/31/09: Fair value of trade-in Cash paid

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$58,000 18,000 $76,000

Balance 12/31/09 $ 788,000 180,000 1,500,000 1,387,000 151,000 $4,006,000

$380,000 23,000 35,000 $438,000 $260,000 27,000 $287,000 $ 3,750 15,250 $ 19,000

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 Less: Book value of machine ($58,000 - 24,650) Gain on sale of machine

$36,500 (33,350) $ 3,150

Trade-in of automobile on 12/31/09: Book value of trade-in ($18,000 - 13,500) Less: Fair value of trade-in Loss on trade-in

$ 4,500 (3,750) $ 750

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Problem 10-4 To reclassify various expenditures incorrectly charged to the intangible asset account. Organization cost expense .............................................. Prepaid insurance ............................................................ Copyright......................................................................... Research and development expense................................ Patent ($3,000 + 12,000) ..................................................... Franchise ......................................................................... Advertising expense ........................................................ Intangible asset ............................................................

7,000 6,000 20,000 40,000 15,000 40,000 16,000 144,000

To reclassify amount paid for Stiltz Corp. incorrectly charged to the intangible asset account. Receivables ..................................................................... Equipment ....................................................................... Patent ............................................................................... Goodwill (determined below).............................................. Note payable ............................................................... Intangible asset ............................................................

100,000 350,000 150,000 120,000 220,000 500,000

Calculation of goodwill: Consideration exchanged Less: Fair value of net assets Goodwill

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$500,000 (380,000) $120,000

Intermediate Accounting, 5/e

Problem 10-5 1. To expense R&D costs. Research and development expense ............................... Cash ............................................................................

12,000 12,000

2. To expense legal fees for unsuccessful defense of patent. Legal fees expense .......................................................... Cash ............................................................................

7,500 7,500

3. To capitalize the cost of equipment. Equipment (cash price)...................................................... Discount on note payable (difference) .............................. Cash (amount paid) ........................................................ Note payable (face amount) ...........................................

23,000 1,000 6,000 18,000

4. To capitalize cost of the sprinkler system. Building - sprinkler system ............................................ Cash ............................................................................

28,000 28,000

5. To capitalize legal fees for successful defense of patent. Patent .............................................................................. Cash ............................................................................

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12,000 12,000

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Problem 10-5 (concluded) 6. To record the trade-in of an old machine for a new machine. Machine - new ($2,000* + 8,000) ....................................... Accumulated depreciation - machine ($7,400 - 3,000) ...... Loss on trade-in ($3,000 – 2,000*) ..................................... Cash ............................................................................. Machine - old ..............................................................

10,000 4,400 1,000 8,000 7,400

*Fair value of old machine (Fair value of new machine - Cash given): $10,000 - 8,000 = $2,000

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Intermediate Accounting, 5/e

Problem 10-6 Southern Company: Cash ................................................................................ Building - new ($1,400,000 - 140,000)................................ Accumulated depreciation - building (account balance) .... Building - old (account balance) .................................... Gain ($1,400,000 – 800,000) ...........................................

140,000 1,260,000 1,200,000 2,000,000 600,000

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) ............................... Accumulated depreciation - building (account balance) .... Cash ............................................................................ Building - old (account balance) .................................... Gain on exchange of buildings ($1,260,000 – 950,000) .

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1,400,000 650,000 140,000 1,600,000 310,000

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Problem 10-7 Robers: Cash ................................................................................. New asset ($75,000 - 5,000) ................................................ Accumulated depreciation - old asset (account balance) .... Old asset (account balance)............................................. Gain on exchange of assets ($75,000 – 65,000)..............

5,000 70,000 55,000 120,000 10,000

Phifer: New asset ($70,000 + 5,000)............................................... Accumulated depreciation - old asset (account balance) .... Loss ($77,000 – 70,000) .............................................................. Cash ............................................................................. Old asset (account balance).............................................

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75,000 63,000 7,000 5,000 140,000

Intermediate Accounting, 5/e

Problem 10-9 Requirement 1 2009: Expenditures for 2009: January 3, 2009 March 1, 2009 June 30, 2009 October 1, 2009

$1,000,000 600,000 800,000 600,000

x x x x

12/12 10/12 6/12 3/12

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

= = = =

$1,000,000 500,000 400,000 150,000

$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)

January 31, 2010 April 30, 2010 August 31, 2010

$3,205,000 270,000 585,000 900,000

x x x x

9/9 8/9 5/9 1/9

Accumulated expenditures (before interest) $4,960,000 Average accumulated expenditures -

= = = =

$3,205,000 240,000 325,000 100,000

$3,870,000

Interest capitalized: $3,870,000 - 3,000,000 x 10.0% x 9/12 = 870,000 x 7.2%* x 9/12 =

$225,000 46,980 $271,980 = Interest capitalized in 2010

* Weighted-average rate of all other debt: $ 4,000,000 x 6% = 6,000,000 x 8% = $10,000,000 Solutions Manual, Vol.1, Chapter 10

$240,000 480,000 $720,000

$720,000 = 7.2% $10,000,000 © The McGraw-Hill Companies, Inc., 2009 10-33

Problem 10-9 (concluded) Requirement 2 Accumulated expenditures 9/30/10 before interest capitalization (above) 2010 interest capitalized (above) Total cost of building

$4,960,000 271,980 $5,231,980

Requirement 3 2009 $3,000,000 x 10% = 4,000,000 x 6% = 6,000,000 x 8% = Total interest incurred Less: Interest capitalized 2009 interest expense

$ 300,000 240,000 480,000 1,020,000 (205,000) $ 815,000

2010 Total interest incurred Less: Interest capitalized 2010 interest expense

© The McGraw-Hill Companies, Inc., 2009 10-34

$1,020,000 (271,980) $ 748,020

Intermediate Accounting, 5/e

Problem 10-10 Requirement 1 2009 Expenditures for 2009 January 3, 2009 March 1, 2009 June 30, 2009 October 1, 2009

1,000,000 600,000 800,000 600,000

x x x x

12/12 10/12 6/12 3/12

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

= = = =

$1,000,000 500,000 400,000 150,000

$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 4,000,000 x 6% = 240,000 6,000,000 x 8% = 480,000 $13,000,000 $1,020,000

$1,020,000 = 7.85% (rounded) $13,000,000

2010: January 1, 2010 ($3,000,000 + 160,925)

January 31, 2010 April 30, 2010 August 31, 2010

$3,160,925 270,000 585,000 900,000

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

x x x x

9/9 8/9 5/9 1/9

= = = =

$3,160,925 240,000 325,000 100,000

$3,825,925

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

Solutions Manual, Vol.1, Chapter 10

© The McGraw-Hill Companies, Inc., 2009 10-35

Problem 10-10 (concluded) Requirement 2 Accumulated expenditures 9/30/10, before interest capitalization (above) 2010 interest capitalized (above) Total cost of building

$4,915,925 225,251 $5,141,176

Requirement 3 2009: $3,000,000 x 10% = 4,000,000 x 6% = 6,000,000 x 8% = Total interest incurred Less: Interest capitalized 2009 interest expense

$ 300,000 240,000 480,000 1,020,000 (160,925) $ 859,075

2010: Total interest incurred Less: Interest capitalized 2010 interest expense

© The McGraw-Hill Companies, Inc., 2009 10-36

$1,020,000 (225,251) $ 794,749

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 ............................... Accumulated depreciation - equipment......................

80,000 80,000

To capitalize filing and legal fees for patent incorrectly charged to R&D expense. Patent .............................................................................. Research and development expense ...........................

40,000 40,000

To reclassify the expenditures made for quality control during commercial production. Inventory* ....................................................................... Research and development expense ...........................

20,000 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.

Solutions Manual, Vol.1, Chapter 10

© The McGraw-Hill Companies, Inc., 2009 10-37

Problem 10-12 Requirement 1 Land Purchase price (determined below) Closing costs Removal of old building Clearing and grading Purchase price of land: Cash paid Value of note†

†

$714,404 20,000 70,000 50,000 $854,404 $200,000 514,404 $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 Building Construction expenditures: May 30 July 30 September 1 October 1 Total expenditures Interest capitalized (determined below) Total cost of building

© The McGraw-Hill Companies, Inc., 2009 10-38

$285,000

$1,200,000 1,500,000 900,000 1,800,000 5,400,000 94,000 $5,494,000

Intermediate Accounting, 5/e

Problem 10-12 (concluded) Average accumulated expenditures: May 31, 2009 $1,200,000 x July 30, 2009 1,500,000 x September 1, 2009 900,000 x October 1, 2009 1,800,000 x

5/6 3/6 2/6 1/6

Interest capitalized: $2,350,000 x 8% x 6/12 =

= $ 1,000,000 = 750,000 = 300,000 = 300,000 $2,350,000 $94,000

Equipment and furniture and fixtures

Equipment Furniture & fixtures Totals

Fair Value $455,000 245,000 $700,000

Initial valuation: Equipment Furniture & fixtures

$390,000 210,000

Percent of Total Fair Value 65% 35% 100%

Initial Valuation % x $600,000 $390,000 210,000 $600,000

Requirement 2 Interest expense: Note issued to purchase land and building, $514,404 x 8% x 9/12 = Construction loan, $3,000,000 x 8% x 8/12 Long-term note, $2,000,000 x 9% Long-term bonds, $4,000,000 x 6% Total Less: Interest capitalized (determined above) Interest expense

Solutions Manual, Vol.1, Chapter 10

$ 30,864 160,000 180,000 240,000 610,864 (94,000) $516,864

© The McGraw-Hill Companies, Inc., 2009 10-39