A311Chapter 10 Problems

E10-2
(Acquisition Costs of Realty)
Pollachek Co. purchased land as a factory site for $450,000. 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. Pollachek paid $2,200 to an engineering firm for a land
survey, and $65,000 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.
Determine the cost of the land and the cost of the building as they should be recorded on the books of
Pollachek Co. Assume that the land survey was for the building.
Cost of land $489,050

Cost of building $2,978,100
E10-2
The allocation of costs would be as follows:

Land Building
Land $450,000
Razing costs 42,000
Salvage (6,300)
Legal fees 1,850
Survey $2,200
Plans 65,000
Title insurance 1,500
Liability insurance 900
Construction 2,740,000
Interest 170,000
$489,050 $2,978,100
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E10-1
(Acquisition Costs of Realty)
The following expenditures and receipts below are related to land, land improvements, and buildings
acquired for use in a business enterprise. The receipts are enclosed in parenthesis.
(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 10,000
(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 25,000
Cost of real estate purchased as a plant site (land €200,000 and building
(h) 250,000
€50,000)
(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
Identify each item by letter and list the items in columnar form, using the headings shown below. (All
receipt amounts should be reported with either a negative sign preceding the number, e.g. -45 or
parenthesis, e.g. (45). If answer is zero please enter 0, do not leave any fields blank.)
Land Land Improvements Building Other Accounts

(a) €0 €0 €0 €(275,000)
(b) 0 0 275,000 0
(c) 10,000 0 0 0
(d) 7,000 0 0 0
(e) 0 0 6,000 0
(f) 0 0 (1,000) 0
(g) 0 0 25,000 0
(h) 250,000 0 0 0
(i) 9,000 0 0 0
(j) 0 4,000 0 0
(k) 11,000 0 0 0
(l) (5,000) 0 0 0
(m) 0 0 13,000 0
(n) 0 19,000 0 0
(o) 14,000 0 0 0
(p) 0 0 3,000 0
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E10-3
(Acquisition Costs of Trucks)
Haddad Corporation operates a retail computer store. To improve delivery services to customers, the
company purchases four new trucks on April 1, 2010. 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 $20,000 and is acquired for a down payment of $2,000 cash and a zero-
interest- bearing note with a face amount of $18,000. The note is due April 1, 2011. Haddad 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 Haddad
carries in inventory. The computer system cost $12,000 and is normally sold by Haddad for $15,200.
Haddad uses a perpetual inventory system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 ordinary shares in Haddad
Corporation. The stock has a par value per share of $10 and a market value of $13 per share.
Prepare the appropriate journal entries for the foregoing transactions for Haddad Corporation. (List multiple
debit/credit entries from largest to smallest amount, e.g. 10, 5, 2. Round answers to the nearest dollar, e.g.
12,510.)
Description/Account Debit Credit
1. Truck 13,900
Cash 13,900
2. Truck 18,364
Notes Payable 16,364
Cash 2,000
3. Truck 15,200
Cost of Goods Sold 12,000
Sales 15,200
Inventory 12,000
4. Truck 13,000
Share Capital—Ordinary 10,000
Share Premium—Ordinary 3,000
E10-3

1. Truck 13,900
Cash 13,900
2. Truck *18,364
Cash 2,000
* PV of $18,000 @ 10% for 1 year =
$18,000 × 0.90909 = $16,364
$16,364 + $2,000 = $18,364
3. Truck 15,200
Cost of Goods Sold 12,000
Sales 15,200
Inventory 12,000
4. Truck (1,000 shares × $13) 13,000
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E10-4
(Purchase and Self-Constructed Cost of Assets)
Dane 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 2011.
Purchase
Cash paid for equipment, including sales tax of €5,000 €105,000
Freight and insurance cost while in transit 2,000
Cost of moving equipment into place at factory 3,100
Wage cost for technicians to test equipment 6,000
Insurance premium paid during first year of operation on this equipment 1,500
Special plumbing fixtures required for new equipment 8,000
Repair cost incurred in first year of operations related to this equipment 1,300

Construction
Material and purchased parts (gross cost €200,000; failed to take 1% cash
€200,000
discount)
Imputed interest on funds used during construction (share financing) 14,000
Labor costs 190,000
Allocated overhead costs (fixed–€20,000; variable–€30,000) 50,000
Profit on self-construction 30,000
Cost of installing equipment 4,400
Compute the total cost for each of these two pieces of equipment.
Purchase equipment €124,100

Construct equipment €442,400
E10-4
Purchase
Cash paid for equipment, including sales tax of
€105,000
€5,000
Freight and insurance while in transit 2,000
Cost of moving equipment into place at factory 3,100
Wage cost for technicians to test equipment 6,000
Special plumbing fixtures required for new equip. 8,000
Total cost €124,100
The insurance premium paid during the first year of operation of this equipment should be reported as
insurance expense, and not be capitalized. Repair cost incurred in the first year of operations related to this
equipment should be reported as repair and maintenance expense, and not be capitalized. Both these costs
relate to periods subsequent to purchase.
Construction
Material and purchased parts (€200,000 ×
€198,000
0.99)
Labor costs 190,000
Overhead costs 50,000
Cost of installing equipment 4,400
Total cost €442,400
Note that the cost of material and purchased parts is reduced by the amount of cash discount not taken
because the equipment should be reported at its cash equivalent price. The imputed interest on funds used
during construction related to stock financing should not be capitalized or expensed. This item is an
opportunity cost that is not reported.
Profit on self-construction should not be reported. Profit should only be reported when the asset is sold.
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E10-5
(Treatment of Various Costs)
Allegro Supply Company, a newly formed corporation, incurred the following expenditures related to Land,
to Buildings, and to Machinery and Equipment.
Abstract company's fee for title search $ 520
Architect's fees 3,170
Cash paid for land and dilapidated building thereon 92,000
Removal of old building $20,000
Less: Residual value 5,500 14,500
Interest on short-term loans during construction 7,400
Excavation before construction for basement 19,000
Machinery purchased (subject to 2% cash discount,
which was not taken) 65,000
Freight on machinery purchased 1,340
Storage charges on machinery, necessitated by
non-completion of building when machinery was 2,180
delivered
New building constructed (building construction took

6
months from date of purchase of land and old
485,000
building)
Assessment by city for drainage project 1,600
Hauling charges for delivery of machinery from

storage to
new building 620
Installation of machinery 2,000
Trees, shrubs, and other landscaping after completion

of
building (permanent in nature) 5,400
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. (If
answer is zero please enter 0, do not leave any fields blank.)
Machinery &
Land Buildings Equipment Other
Abstract fee $520 $0 $0 $0
Architect's fees 0 3,170 0 0
Cash paid for land and old building 92,000 0 0 0
Removal of old building 14,500 0 0 0
Interest on loans during construction 0 7,400 0 0
Excavation before construction 0 19,000 0 0
Machinery purchased 0 0 63,700 1,300
Freight on machinery 0 0 1,340 0
Storage charges caused by non-completion
0 0 0 2,180
of building
New building 0 485,000 0 0
Assessment by city 1,600 0 0 0
Hauling charges - machinery 0 0 0 620
Installation - machinery 0 0 2,000 0
Landscaping 5,400 0 0 0
$114,02
$514,570 $67,040 $4,100
0
E10-5
Machinery
Land Buildings & Equipment Other
Abstract fees $520 $ 0 $ 0 $ 0
Architect's fees 0 3,170 0 0
Cash paid for land and old building 92,000 0 0 0
Removal of old building ($20,000 - $5,500) 14,500 0 0 0
Interest on loans during construction 0 7,400 0 0
Excavation before construction 0 19,000 0 0
Machinery purchased 0 0 63,700 1,300 Misc. ex
Freight on machinery 0 0 1,340 0
Storage charges caused by non-completion of
0 0 0 2,180 Misc. ex
bldg
New building 0 485,000 0 0
Assessment by city 1,600 0 0 0
Hauling charges - machinery 0 0 0 620 Misc. ex
Installation - machinery 0 0 2,000 0
Landscaping 5,400 0 0 0
$114,020 $514,570 $67,040 $4,100
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E10-6
(Correction of Improper Cost Entries)
Plant acquisitions for selected companies are as follows.

1. Natchez Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Vivace Co.,
for a lump-sum price of $680,000. At the time of purchase, Vivace's assets had the following book and
appraisal values.
Book Values Appraisal Values
Land $200,000 $150,000
Buildings 230,000 350,000
Equipment 300,000 300,000
To be conservative, the company decided to take the lower of the two values for each asset acquired.
The following entry was made.
Land 150,000
Buildings 230,000
Equipment 300,000
Cash 680,000
2. Arawak 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.
Store Equipment 27,300
Cash 2,000
Note Payable 23,000
Interest Payable 2,300
3. Ace Company purchased Office Equipment for $20,000, terms 2/10, n/30. Because the company
intended to take the discount, it made no entry until it paid for the acquisition. The entry was:
Office Equipment 20,000
Cash 19,600
Purchase Discounts 400
4. Paunee 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 $270,000. The company made no entry to
record the land because it had no cost basis.
5. Mohegan Company built a warehouse for $600,000. It could have purchased the building for $740,000.
The controller made the following entry.
Warehouse 740,000
Cash 600,000
Profit on Construction 140,000
Prepare the entry that should have been made at the date of each acquisition. (List multiple debit/credit
entries from largest to smallest amount, e.g. 10, 5, 2.)

1. Buildings 297,500
Equipment 255,000
Land 127,500
Cash 680,000
2. Store Equipment 25,000
Note Payable 23,000
Cash 2,000
3. Office Equipment 19,600
Accounts Payable 19,600
4. Land 270,000
Deferred Grant Revenue 270,000
5. Warehouse 600,000
Cash 600,000
E10-6
1. Buildings * 297,500
Equipment ** 255,000
Land *** 127,500
Cash 680,000
2. Store Equipment 25,000
Note Payable 23,000
Cash 2,000
3. Office Equipment 19,600
Accounts Payable ($20,000 × 0.98) 19,600
4. Building 270,000
Deferred Grant Revenue 270,000
5. Warehouse 600,000
Cash 600,000
$350,000
$680,000 × = $297,500 * Buildings
$800,000

$300,000
$680,000 × = $255,000 ** Equipment
$800,000

$150,000
$680,000 × = $127,500 *** Land
$800,000
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E10-7
(Capitalization of Interest)
McPherson Furniture Company started construction of a combination office and warehouse building for its own
use at an estimated cost of €5,200,000 on January 1, 2010. McPherson expected to complete the building by
December 31, 2010. McPherson has the following debt obligations outstanding during the construction period.
Construction loan–12% interest, payable semiannually, issued
December 31, 2009 €2,000,000
Short-term loan–10% interest, payable monthly, and principal
payable at maturity on May 30, 2011 1,600,000
Long-term loan–11% interest, payable on January 1 of each
year. Principal payable on January 1, 2014 1,000,000
E10-7
Assume that McPherson completed the office and warehouse building on December 31, 2010, as planned at
a total cost of €5,200,000, and the weighted-average of accumulated expenditures was €3,800,000. Compute
the avoidable interest on this project. (Round interest percentage to 2 decimal place, e.g. 2.25 and use this
amount for future calculations. Round final answer to 0 decimal places, e.g. 250,210.)
€426,840
Avoidable Interest
Weighted-Average
Accumulated Expenditures × Interest Rate = Avoidable Interest
€2,000,000 12% €240,000
1,800,000 10.38% 186,840
€3,800,000 €426,840
Weighted-average interest rate computation Principal Interest
10% short-term loan €1,600,000 €160,000
11% long-term loan 1,000,000 110,000
€2,600,000 €270,000
Total Interest €270,000
= = 10.38%
Total Principal €2,600,000
E10-7
Compute the depreciation expense for the year ended December 31, 2011. McPherson elected to depreciate
the building on a straight-line basis and determined that the asset has a useful life of 30 years and a residual
value of €300,000. (Round answer to 0 decimal places, e.g. 270,200.)
€177,561
Actual Interest
Construction loan €2,000,000 × 12% €240,000
Short-term loan €1,600,000 × 10% 160,000
Long-term loan €1,000,000 × 11% 110,000
Total €510,000
Because avoidable interest in lower than actual interest, use avoidable interest.
Cost €5,200,000
Interest capitalized 426,840
Total cost €5,626,840
€5,626,840 - €300,000
Depreciation Expense = = €177,561
30 years
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E10-8
On December 31, 2009, Hurston Inc. borrowed $3,000,000 at 12% payable annually to finance the construction
of a new building. In 2010, the company made the following expenditures related to this building: March 1,
$360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,200,000. Additional information is provided as
follows.
1. Other debt outstanding
10-year, 11% bond, December 31, 2003, interest payable annually $4,000,000
6-year, 10% note, dated December 31, 2007, interest payable annually $1,600,000
2. March 1, 2010, expenditure included land costs of $150,000
3. Interest revenue earned in 2010 on funds related to specific borrowing $49,000
E10-8
Determine the amount of interest to be capitalized in 2010 in relation to the construction of the building.
$180,000
Computation of Weighted-Average Accumulated Expenditures

Capitalization Weighted-Average
Date Amount × Period = Accumulated Expenditures
March 1 $360,000 10/12 $300,000
June 1 600,000 7/12 350,000
July 1 1,500,000 6/12 750,000
December
1,200,000 1/12 100,000
1
$3,660,000 $1,500,000
Computation of Avoidable Interest
Weighted-Average
Accumulated Avoidable
Expenditures × Interest Rate = Interest
$1,500,000 0.12 (Construction loan) $180,000
Computation of Actual Interest
Actual Interest:
$3,000,000 × 12% $360,000
$4,000,000 × 11% 440,000
$1,600,000 × 10% 160,000
$960,000
Note: Use avoidable interest for capitalization purposes because it is lower than actual interest. The
$180,000 of avoidable interest is reduced by the $49,000 of interest revenue earned on specific
borrowing.
E10-8
Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if
any, at December 31, 2010. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5,
2.)

Interest Expense 829,000
Building 131,000
Cash 960,000
E10-8

Interest Expense * 829,000
Building 131,000
Cash ($360,000 + $440,000 + $160,000) 960,000
* Actual interest for year $960,000
Less: Amount capitalized ($180,000 –
(131,000)
$49,000)
Interest expense debit $829,000
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E10-9
On July 31, 2010, Bismarck Company engaged Duval Tooling Company to construct a special-purpose piece of
factory machinery. Construction was begun immediately and was completed on November 1, 2010. To help
finance construction, on July 31 Bismarck issued a $400,000, 3-year, 12% note payable at Wellington National
Bank, on which interest is payable each July 31. $300,000 of the proceeds of the note was paid to Duval 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, Bismarck made a final $100,000 payment to Duval.
Other than the note to Wellington, Bismarck's only outstanding liability at December 31, 2010, is a $30,000,
8%, 6-year note payable, dated January 1, 2007, on which interest is payable each December 31.
E10-9
Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total
interest cost to be capitalized during 2010.
Interest revenue $2,500

Weighted-average accumulated expenditures $75,000
Avoidable interest $9,000
Interest capitalized $6,500
Computation of Weighted-Average Accumulated Expenditures
Weighted-Average Accumulated
Date Amount × Capitalization Period = Expenditures
July 31 $300,000 3/12 $75,000
November 1 100,000 0 0
$75,000
Interest Revenue $100,000 × 10% × 3/12 = $2,500
Avoidable Interest

Weighted-Average
Accumulated Avoidable
Expenditures × Interest Rate = Interest
$75,000 12% $9,000
Actual interest

$400,000 × 12% × 5/12 $20,000
$30,000 × 8% 2,400
$22,400
Interest capitalized $6,500 ($9,000 – $2,500)
E10-9
Prepare the journal entries needed on the books of Bismarck Company at each of the following dates. (1)
July 31, 2010. (2) November 1, 2010. (3) December 31, 2010. (List multiple debit/credit entries from
largest to smallest amount, e.g. 10, 5, 2.)
Date Description/Account Debit Credit

7/31 Cash 400,000
Note Payable 400,000
Machine 300,000
Trading Securities 100,000
Cash 400,000
11/1 Cash 102,500
Interest Revenue 2,500
Machine 100,000
Cash 100,000
12/31 Interest Expense 15,900
Machine 6,500
Interest Payable 20,000
Cash 2,400
E10-9

7/31 Cash 400,000
Machine 300,000
Cash 400,000
11/1 Cash 102,500
Interest Revenue ($100,000 × 10% ×
2,500
3/12)
Machine 100,000
Cash 100,000
12/31 Interest Expense ($22,400 - $6,500) 15,900
Machine 6,500
Interest Payable ($400,000 × 12% × 5/12) 20,000
Cash ($30,000 × 8%) 2,400
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E10-10
The following three situations involve the capitalization of interest.
Situation I
On January 1, 2010, Columbia, 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, 2010, to finance the construction cost, Columbia borrowed $4,000,000 payable in
10 annual installments of $400,000, plus interest at the rate of 10%. During 2010, Columbia made deposit
and progress payments totaling $1,500,000 under the contract; the weighted-average amount of accumulated
expenditures was $900,000 for the year. The excess borrowed funds were invested in short-term securities,
from which Columbia realized investment income of $50,000.
What amount should Columbia report as capitalized interest at December 31, 2010?
$40,000
Situation II
During 2010, Evander Corporation constructed and manufactured certain assets and incurred the following
interest costs in connection with those activities.
Interest Costs

Incurred
Warehouse constructed for Evander's own use $30,000
Special-order machine for sale to unrelated customer, produced
9,000
according to customer's specifications
Inventories routinely manufactured, produced on a repetitive basis 8,000
All of these assets required an extended period of time for completion.
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be
capitalized?
$39,000
Situation III
Antonio, Inc. has a fiscal year ending April 30. On May 1, 2010, Antonio 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, 2011, expenditures for the partially completed
structure totaled $6,000,000. These expenditures were incurred evenly throughout the year. Interest earned
on the unexpended portion of the loan amounted to $150,000 for the year.
How much should be shown as capitalized interest on Antonio's financial statements at April 30, 2011?
$180,000
E10-10
Situation I.
$40,000—The requirement is the amount Columbia should report as capitalized interest at 12/31/10. The
amount of interest eligible for capitalization is
Weighted-Average Accumulated Expenditures × Interest Rate = Avoidable Interest
Since Columbia has outstanding debt incurred specifically for the construction project, in an amount
greater than the weighted-average accumulated expenditures of $900,000, the interest rate of 10% is used
for capitalization purposes. Therefore, the avoidable interest is $40,000, which is less than the actual
interest, computed as interest on specific borrowing less investment income on those funds:
($900,000 × 0.10 = $90,000) - $50,000 Investment Income
Situation II.
$39,000—The requirement is total interest costs to be capitalized. IFRS identifies assets which qualify for
interest capitalization: assets constructed for an enterprise’s own use and assets intended for sale or lease
that are produced as discrete projects. Inventories that are routinely produced in large quantities on a
repetitive basis do not qualify for interest capitalization. Therefore, only $30,000 and $9,000 are
capitalized.
Situation III.
$180,000—The requirement is to determine the amount of interest to be capitalized on the financial
statements at April 30, 2011. The IFRS requirements are met: (1) expenditures for the asset have been
made, (2) activities that are necessary to get the asset ready for its intended use are in progress, and (3)
interest cost is being incurred. The amount to be capitalized is determined by applying an interest rate to
the weighted-average amount of accumulated expenditures for the asset during the period. Because the
$6,000,000 of expenditures incurred for the year ended April 30, 2011, were incurred evenly throughout
the year, the weighted-average amount of expenditures for the year is $3,000,000, ($6,000,000 ÷ 2).
Therefore, the amount of interest to be capitalized is $180,000 [($3,000,000 × 11%) – $150,000 (interest
earned)]. In any period the total amount of interest cost to be capitalized shall not exceed the total amount
of interest cost incurred by the enterprise. (Total interest is $1,100,000).
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E10-11
(Entries for Equipment Acquisitions)

Song Engineering Corporation purchased conveyor equipment with a list price of ₩15,000. Presented below
are three independent cases related to the equipment (000 omitted).
(a) Song paid cash for the equipment 8 days after the purchase. The vendor's credit terms were 2/10, n/30.
Assume that equipment purchases are recorded gross.
(b) Song traded in equipment with a book value of ₩2,000 (initial cost ₩8,000), and paid ₩14,200 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) Song gave the vendor a ₩16,200 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%.
Prepare the general journal entries required to record the acquisition and payment in each of the independent
cases above. (Round to 0 decimal places, e.g. 1,510. List multiple debit/credit entries from largest to
smallest amount, e.g. 10, 5, 2.)

(a) Equipment 15,000
(To record purchase.)
Cash 14,700
Equipment 300
(To record payment.)
(b) Equipment (new) 14,600
Accumulated Depreciation 6,000
Loss on Disposal of Equipment 1,600
Equipment (old) 8,000
(To record equipment traded in.)
Cash 14,200
(To record payment.)
(c) Equipment 14,862
(To record non-interest-bearing note.)
Cash 16,200
(To record payment of note.)
E10-11
(a) Equipment 15,000
Cash 14,700
Equipment (₩15,000 × 0.02) 300
(b) Equipment (new) *14,600
Loss on Disposal of Equipment ** 1,600
Equipment (old) 8,000
Cash 14,200
(c) Equipment (₩16,200 × 0.91743) 14,862
Note Payable 14,862
Note Payable 14,862
Cash 16,200
** Cost ₩8,000
Accumulated depreciation 6,000
Book value 2,000
Fair market value 400
Loss ₩1,600

* Cost (₩14,200 + ₩400) ₩14,600
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E10-12
(Entries for Asset Acquisition, Including Self-Construction)
Below are transactions related to Impala 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) 14,000 ordinary shares with a par value of $50 per share are issued in exchange for land and buildings.
The property has been appraised at a fair market value of $810,000, of which $180,000 has been
allocated to land and $630,000 to buildings. The shares of Impala Company are not listed on any
exchange, but a block of 100 shares was sold by a shareholder 12 months ago at $65 per share, and a
block of 200 shares was sold by another shareholder 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.
Materials used $12,500
Factory supplies used 900
Direct labor incurred 16,000
Additional overhead (over regular) caused by construction
of machinery, excluding factory supplies used 2,700
Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost
Cost of similar machinery if it had been purchased from outside
44,000
suppliers
Prepare journal entries on the books of Impala Company to record these transactions. (List multiple
debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

(a) Land 81,000
Grant Revenue 81,000
(b) Buildings 630,000
Land 180,000
(c) Machinery 41,700
Direct Labor 16,000
Factory Overhead 13,200
Materials 12,500
E10-12

(a) Land 81,000
Grant Revenue 81,000
(b) Buildings 630,000
Land 180,000
Share Capital—Ordinary ($50 × $14,000) 700,000
Share Premium—Ordinary* 110,000
(c) Machinery 41,700
Direct Labor 16,000
Factory Overhead **13,200
Materials 12,500
* Since the market value of the stock is not determinable, the market value of the property is used as the
basis for recording the asset and issuance of the shares.
** Fixed overhead applied (60% × $16,000) $9,600

Additional overhead 2,700
Factory supplies used 900
$13,200
**************************************************************************************************
E10-13
(Entries for Acquisition of Assets)
Presented below is information related to Rommel Company.
1. On July 6 Rommel Company acquired the plant assets of Studebaker Company, which had
discontinued operations. The appraised value of the property is:
Land $400,000
Building 1,200,000
Machinery and equipment 800,000
Total $2,400,000
2. Rommel Company gave 12,500 shares of its $100 par value ordinary shares in exchange. The shares
had a market value of $180 per share on the date of the purchase of the property.
3. Rommel Company expended the following amounts in cash between July 6 and December 15, the
date when it first occupied the building.
Repairs to building $105,000

Construction of bases for machinery to be installed later 135,000
Driveways and parking lots 122,000
Remodeling of office space in building, including new partitions and
161,000
walls
Special assessment by city on land 18,000
4. On December 20, the company paid cash for machinery, $280,000, subject to a 2% cash discount,
and freight on machinery of $10,500.
Prepare entries on the books of Rommel Company for these transactions. (List multiple debit/credit entries
from largest to smallest amount, e.g. 10, 5, 2. Do not round the % of cost allocation in your
computations.)
1. Building 1,125,000
Machinery and Equipment 750,000
Land 375,000
Share Capital—Ordinary 1,250,000
Share Premium—Ordinary 1,000,000
2. Building 266,000
Land Improvements 122,000
Land 18,000
Cash 541,000
3. Machinery and Equipment 284,900
Cash 284,900
E10-13

1. Building 1,125,000
Land 375,000
Share Capital—Ordinary (12,500 ×
1,250,000
$100)
Share Premium—Ordinary 1,000,000
($2,250,000 - $1,250,000)

The cost of the property, plant and equipment is $2,250,000 (12,500 × $180).
The cost is allocated based on appraisal values as follows:

$400,000
Land × $2,250,000 = $375,000
$2,400,000
$1,200,000
Building × $2,250,000 = $1,125,000
$2,400,000
Machinery & $800,000
× $2,250,000 = $750,000
Equipment $2,400,000

2. Building ($105,000 + $161,000) 266,000
Land Improvements 122,000
Land 18,000
Cash 541,000
3. Machinery and Equipment 284,900
Cash ($10,500 + $274,400, which is 98% 284,900
of $280,000)
**************************************************************************************************
E10-14
(Purchase of Equipment with Zero-Interest-Bearing Debt)
Sterling Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2010, to
expand its production capacity to meet customers' demand for its product. Sterling issues a $900,000, 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 $180,000 installments
due at the end of each year over the life of the note.
E10-14
Prepare the journal entry(ies) at the date of purchase. (Round all calculations and final answers to 0
decimal places, e.g. 250,500 and use this rounded amount for future calculations.)

Equipment 648,860

Equipment 648,860
PV of $180,000 annuity @ 12% for 5 years
($180,000 × 3.60478) = $648,860
E10-14
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. (Round all calculations and final answers to 0 decimal
places, e.g. 250,500 and use this rounded amount for future calculations. List multiple debit/credit entries
from largest to smallest amount, e.g. 10, 5, 2.)

Cash 180,000

Interest Expense (12% × $648,860) 77,863
Cash 180,000
Reduction
Year Note Payment 12% interest of Principal Balance
1/2/10 $648,860
12/31/10 $180,000 $77,863 $102,137 546,723
12/31/11 180,000 65,607 114,393 432,330
E10-14
Prepare the journal entry(ies) at the end of the second year to record the payment and interest. (Round all
calculations and final answers to 0 decimal places, e.g. 250,500 and use this rounded amount for future
calculations. List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

Cash 180,000
E10-14
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.) (Round all calculations and
final answers to 0 decimal places, e.g. 250,500 and use this rounded amount for future calculations.)

Depreciation Expense 64,886
**************************************************************************************************
E10-15
(Purchase of Computer with Zero-Interest-Bearing Debt)
Napoleon Corporation purchased a computer on December 31, 2009, for $130,000, paying $30,000 down and
agreeing to pay the balance in five equal installments of $20,000 payable each December 31 beginning in 2010.
An assumed interest rate of 10% is implicit in the purchase price.
E10-15
Prepare the journal entry(ies) at the date of purchase. (Round computations for Discount Factor to 5
decimal places, e.g. 3.52642 and use this rounded amount for future calculations. Round other
calculations and final answers to 2 decimal places, e.g. 25,500.25. List multiple debit/credit entries from

Equipment 105,815.80
Notes Payable 75,815.80
Cash 30,000.00

Equipment *105,815.80
Cash 30,000.00
* PV of $20,000 annuity @ 10% for 5 years
$20,000 × 3.79079 $75,815.80
Down payment 30,000.00
Capitalized value of equipment $105,815.80
E10-15
Prepare the journal entry(ies) at December 31, 2010, to record the payment and interest (effective-interest
method employed). (Round all calculations to 2 decimal places, e.g. 25,500.20 and use this rounded
amount for future calculations. Round all final answers to 2 decimal places, e.g. 25,500.25. List multiple

Interest Expense 7,581.58
Cash 20,000.00

Interest Expense (see schedule) 7,581.58
Cash 20,000.00
Reduction
Year Note Payment 10% interest of Principal Balance
12/31/09 $75,815.80
12/31/10 $20,000.00 $7,581.58 $12,418.42 63,397.38
12/31/11 20,000.00 6,339.74 13,660.26 49,737.12
E10-15
Prepare the journal entry(ies) at December 31, 2011, to record the payment and interest (effective-interest
method employed). (Round all calculations to 2 decimal places, e.g. 25,500.20 and use this rounded
amount for future calculations. Round all final answers to 2 decimal places, e.g. 25,500.25. List multiple

Interest Expense 6,339.74
Cash 20,000.00
**************************************************************************************************
E10-16
(Asset Acquisition)
Logan 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 $104,000 cash. The following information was gathered.
Depreciation to
Initial Cost Date on Seller's Book Value
Description/Account on Seller's Books Books on Seller's Books Appraised Value
Machinery $100,000 $50,000 $50,000 $90,000
Office Equipment 60,000 10,000 50,000 30,000
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. (Note: Do not round the proportion of cash received when
doing calculations.)
Cost of machinery traded $100,000
Accumulated depreciation to date of sale 36,000
Fair market value of machinery traded 80,000
Cash received 10,000
Fair market value of machinery acquired 70,000
Asset 5
Office equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market
value of $11 per share. (Note: Do not round the current year capitalization period when doing
calculations.)
Construction of Building
A building was constructed on land purchased last year at a cost of $180,000. Construction began on
February 1 and was completed on November 1. The payments to the contractor were as follows.
Date Payment
2/1 $120,000
6/1 360,000
9/1 480,000
11/1 100,000
To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1.
The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a
borrowing rate of 8%.
Record the acquisition of each of these assets. (List multiple debit/credit entries from largest to smallest
amount, e.g. 10, 5, 2.)

Asset 1 & 2
Machinery 78,000
Cash 104,000

Asset 3
Machinery 35,900
Cash 10,000

Asset 4
Machinery 54,000
Cash 10,000
Machinery 100,000

Asset 5
Share Capital—Ordinary 800
Share Premium—Ordinary 300

Building
Building 1,114,600
Land 180,000
Cash 1,240,000
E10-16
LOGAN INDUSTRIES
Acquisition of Assets 1 & 2

Use appraised values to break-out the lump-sum purchase.
Description/Accoun Value on
Appraisal Percentage Lump-Sum
t Books
Machinery $90,000 90/120 $104,000 $78,000
Office Equipment 30,000 30/120 104,000 26,000
$120,000
Machinery 78,000
Cash 104,000
Acquisition of Asset 3

Use the cash price as a basis for recording the asset with a discount recorded on the
note.
Machinery 35,900
Cash 10,000

Since the exchange lacks commercial substance, the gain of $16,000 is not recognized.
Instead the gain of $16,000 ($80,000 – $64,000) is used to reduce the basis of the asset
acquired.
Machinery ($70,000 - $16,000) 54,000
Cash 10,000
Machinery 100,000

In this case the Office Equipment should be placed on Logan's books at the market value of
the stock. The difference between the share's par value and their fair market value (based on
market price) should be credited to Share Premium.
Office Equipment (100 × $11 per share) 1,100
Share Capital—Ordinary 800
Share Premium—Ordinary *300
*($11 – $8) × 100 Shares.
Schedule of Weighted Average Accumulated Expenditures

Current Year Weighted-Average
Capitalization Accumulated
Date Amount Period Expenditures
February 1 $180,000 9/12 $135,000
February 1 120,000 9/12 90,000
June 1 360,000 5/12 150,000
September
480,000 2/12 80,000
1
November
100,000 0/12 0
1
$1,240,000 $455,000

Note that capitalization is only 9 months in this problem.
Avoidable Interest

Weighted-Average
Accumulated
Expenditures Interest Rate Avoidable Interest
$455,000 × 12% = $54,600

Since, the weighted expenditures are less than the amount of specific borrowing,
the specific borrowing rate is used.
Land Cost $180,000
Building Cost $1,114,600 ($1,060,000 + $54,600)

Building 1,114,600
Land 180,000
Cash 1,240,000
**************************************************************************************************
E10-17
(Non-monetary Exchange)
Alatorre Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting
department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of
an adding machine. Before long, the accountant, who had never before seen such a machine, managed to
break the machine. Alatorre Corporation gave the machine plus €320 to Mills Business Machine Company
(dealer) in exchange for a new machine. Assume the following information about the machines.
Mills Co.
Alatorre Corp.
(New
(Old Machine)
Machine)
Machine cost €290 €270
Accumulated depreciation 140 -0-
Fair value 85 405
For each company, prepare the necessary journal entry to record the exchange. (The exchange has
commercial substance.) (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

Alatorre Corporation
Machine 405
Accumulated Depreciation 140
Loss on Disposal of Machine 65
Cash 320
Machine 290
Mills Business Machine Company
Cash 320
Cost of Goods Sold 270
Inventory 85
Sales 405
Inventory 270
E10-17

Alatorre Corporation
Machine (€320 + €85) 405
Accumulated Depreciation 140
Loss on Disposal of Machine * 65
Cash 320
Machine 290
Mills Business Machine Company
Cash 320
Cost of Goods Sold 270
Inventory 85
Sales 405
Inventory 270
Computation of loss:
* Book value of old machine (€290 - €140) €150

Fair value of old machine (85)
Loss on exchange €65
**************************************************************************************************
E10-18
Montgomery Company purchased an electric wax melter on April 30, 2011, by trading in its old gas model
and paying the balance in cash. The following data relate to the purchase.
List price of new melter $15,800
Cash paid 10,000
Cost of old melter (5-year life, $700 residual
12,700
value)
Accumulated depreciation–old melter (straight-
7,200
line)
Fair value of old melter 5,200
Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has
commercial substance, and (b) lacks commercial substance. Montgomery's fiscal year ends on December 31,
and depreciation has been recorded through December 31, 2010. (List multiple debit/credit entries from

(a) Depreciation Expense 800
Accumulated Depreciation-Melter 800
(To record depreciation expense.)
Melter 15,200
Accumulated Depreciation-Melter 8,000
Melter 12,700
Cash 10,000
Gain on Disposal of Plant Assets 500
(To record purchase and trade-in of melter.)
(b) Depreciation Expense 800
Melter 14,700
Melter 12,700
Cash 10,000
(To record purchase and trade-in of Melter.)
E10-18
(a)Exchange has commercial substance:

Depreciation Expense 800
($12,700 - $700 = $12,000;
$12,000 ÷ 5 = $2,400;
$2,400 × 4/12 = $800)
Melter **15,200
Melter 12,700
Cash 10,000
Gain on Disposal of Plant Assets *500
* Cost of old asset $12,700
Accumulated depreciation ($7,200 +
(8,000)
$800)
Book value 4,700
Fair value of old asset (5,200)
Gain (on disposal of plant asset) $500
** Cash paid $10,000
**************************************************************************************************
E10-19
(Non-Monetary Exchange)
Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar
equipment used in the operations of Delaware Company. The following information pertains to the exchange.
Santana Co. Delaware Co.
Equipment (cost) $28,000 $28,000
Accumulated Depreciation 19,000 10,000
Fair value of equipment 13,500 15,500
Cash given up 2,000
E10-19
Prepare the journal entries to record the exchange on the books of both companies. Assume that the
exchange lacks commercial substance. (List multiple debit/credit entries from largest to smallest amount,
e.g. 10, 5, 2.)

Santana Company
Equipment 11,000
Equipment 28,000
Cash 2,000

Delaware Company
Equipment 13,500
Accumulated Depreciation—Equipment 10,000
Loss on Disposal of Plant Assets 2,500
Cash 2,000
Equipment 28,000
Exchange lacks commercial substance.

Santana Company
Equipment 11,000
Equipment 28,000
Cash 2,000
Valuation of equipment:
Book value of equipment
$9,000
given
Cash paid 2,000
New equipment $11,000
OR
Fair value received $15,500
Less: Gain deferred * 4,500
New equipment $11,000
*
Fair value of old equipment $13,500
Book value of old equipment (9,000)
Gain on disposal $4,500
Delaware Company
Equipment 13,500
Loss on Disposal of Plant Assets *2,500
Cash 2,000
Equipment 28,000
* Computation of loss:
Book value of old equipment $18,000
Fair value of old equipment 15,500
Loss on disposal of equipment $2,500
E10-19
Prepare the journal entries to record the exchange on the books of both companies. Assume that the
exchange has commercial substance. (List multiple debit/credit entries from largest to smallest amount, e.g.
10, 5, 2.)

Santana Company
Equipment 15,500
Equipment 28,000
Gain on Disposal of Equipment 4,500
Cash 2,000

Delaware Company
Equipment 13,500
Accumulated Depreciation—Equipment (Old) 10,000
Loss on Disposal of Equipment 2,500
Cash 2,000
Equipment 28,000
Exchange has commercial substance
Santana Company
Equipment * 15,500
Equipment 28,000
Gain on Disposal of Equipment ** 4,500
Cash 2,000
* Cost of new equipment:
Cash paid $2,000
Cost of new equipment $15,500

** Computation of Gain on Disposal of

Equipment:
Fair value of old equipment $13,500
Book value of old equipment ($28,000 -
9,000
$19,000)
Gain on Disposal of Equipment $4,500
Delaware Company
Equipment * 13,500
Accumulated Depreciation—Equipment
10,000
(Old)
Loss on Disposal of Equipment ** 2,500
Cash 2,000
Equipment 28,000
* Cost of new equipment:
Fair value of equipment $15,500
Less: Cash received 2,000

**
Computation of loss on disposal of equipment:
Book value of old equipment ($28,000 -
$18,000
$10,000)
Loss on Disposal of Equipment $2,500
**************************************************************************************************
E10-20
McArthur Inc. has negotiated the purchase of a new piece of automatic equipment at a price of $7,000 plus
trade-in, f.o.b. factory. McArthur Inc. paid $7,000 cash and traded in used equipment. The used equipment had
originally cost $62,000; it had a book value of $42,000 and a secondhand market value of $45,800, as indicated
by recent transactions involving similar equipment. Freight and installation charges for the new equipment
required a cash payment of $1,100.
E10-20
Prepare the general journal entry to record this transaction, assuming that the exchange has commercial
substance. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)

Automatic Equipment 53,900
Accumulated Depreciation-Equipment 20,000
Equipment 62,000
Cash 8,100

Accumulated Depreciation-Equipment *20,000
Equipment 62,000
Cash ($7,000 + $1,100) 8,100
*$62,000 - $42,000
Valuation of equipment
Cash $7,000
Installation cost 1,100
Market value of used equipment 45,800
Computation of gain
Cost of old asset $62,000
Book value 42,000
Fair market value of old asset 45,800
Gain on disposal of equipment $3,800
E10-20
Assuming the same facts as in (a) except that fair value information for the assets exchanged is not
determinable, prepare the general journal entry to record this transaction. (List multiple debit/credit entries

Equipment 62,000
Cash 8,100

Automatic Equipment * 50,100
Equipment 62,000
Cash 8,100
*
Basis of new equipment
Book value of old equipment $42,000
Cash paid (including installation
8,100
costs)
Basis of new equipment $50,100
**************************************************************************************************
E10-21
(Government Grants)
Rialto Group received a grant from the government of £100,000 to acquire £500,000 of delivery equipment on
January 2, 2010. The delivery equipment has a useful life of 5 years. Rialto uses the straight-line method of
depreciation. The delivery equipment has a zero residual value.
E10-21
If Rialto Group reports the grant as a reduction of the asset, answer the following questions. (If answer is
zero please enter 0, do not leave any fields blank.)
1. What is the carrying amount of the delivery equipment at December 31, 2010?
£320,000
2. What is the amount of depreciation expense related to the delivery equipment in 2011?
£80,000
3. What is the amount of grant revenue reported in 2010 on the income statement?
£0
1. Carrying amount = £320,000 (£400,000 – £80,000)

2. Depreciation expense = £80,000 (£400,000 ÷ 5 yrs.)
3. Grant revenue = 0
E10-21
If Rialto Group reports the grant as deferred grant revenue, answer the following questions.
1. What is the balance in the deferred grant revenue account at December 31, 2010?
£80,000
2. What is the amount of depreciation expense related to the delivery equipment in 2011?
£100,000
3. What is the amount of grant revenue reported in 2010 on the income statement?
£20,000
1. Deferred grant revenue balance = £80,000 (£100,000 – £20,000)

2. Depreciation expense = £100,000 (£500,000 ÷ 5 yrs.)
3. Grant revenue = £20,000
**************************************************************************************************
E10-22
(Government Grants)
Yilmaz Company is provided a grant by the local government to purchase land for a building site. The grant is a
zero-interest-bearing note for 5 years. The note is issued on January 2, 2010, for €5 million payable on January
2, 2015. Yilmaz’s incremental borrowing rate is 6%. The land is not purchased until July 15, 2010.
E10-22
Prepare the journal entry(ies) to record the grant and note payable on January 2, 2010. (Round computations
for Discount Factor to 5 decimal places, e.g. 0.52642 and use this rounded amount for future
calculations. Round final answers to 0 decimal places, e.g. 25,500.)

Jan. 2 Cash 3,736,300
Note Payable 3,736,300
(To record note payable.)
Jan.2 Cash 1,263,700
Deferred Grant Revenue 1,263,700
(To record grant.)

Jan. 2 Cash (€5,000,000 × 0.74726) 3,736,300
Notes Payable 3,736,300
Jan. 2 Cash 1,263,700
Deferred Grant Revenue 1,263,700
E10-22
Determine the amount of interest expense and grant revenue to be reported on December 31, 2010.
Interest Expense €224,178

Grant Revenue €224,178
Interest expense – 2010 = €3,736,300 × 0.06 = €224,178
Grant revenue – 2010 = €224,178
**************************************************************************************
****
E10-24
(Analysis of Subsequent Expenditures)
The following transactions occurred during 2011. Assume that depreciation of 10% per year is charged on all
machinery and 5% per year on buildings, on a straight-line basis, with no estimated residual value.
Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is
charged on fixed assets disposed of during the year.
Jan. 30 A building that cost $112,000 in 1994 is torn down to make room for a new building. The wrecking
contractor was paid $5,100 and was permitted to keep all materials salvaged.
Mar. 10 Machinery that was purchased in 2004 for $16,000 is sold for $2,900 cash, f.o.b. purchaser's plant.
Freight of $300 is paid on the sale of this machinery.
Mar. 20 A gear breaks on a machine that cost $9,000 in 2006. The gear is replaced at a cost of $3,000. The
replacement does not extend the useful life of the machine.
May 18 A special base installed for a machine in 2005 when the machine was purchased has to be replaced
at a cost of $5,500 because of defective workmanship on the original base. The cost of the
machinery was $14,200 in 2005. The cost of the base was $4,000, and this amount was charged to
the Machinery account in 2005.
June 23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was
constructed in 2007.
Prepare general journal entries for the transactions. (List multiple debit/credit entries from largest to
smallest amount, e.g. 10, 5, 2.)

Jan. 30 Accumulated Depreciation-Buildings 95,200
Buildings 112,000
Cash 5,100
Mar. 10 Accumulated Depreciation-Machinery 11,200
Cash 2,600
Machinery 16,000
Mar. 20 Machinery 3,000
Cash 3,000
May 18 Machinery 5,500
Accumulated Depreciation-Machinery 2,400
Cash 5,500
Machinery 4,000
June 23 Building Maintenance and Repairs Expense 6,900
Cash 6,900

Jan. 30 Accumulated Depreciation-Buildings * 95,200
Loss on Disposal of Plant Assets ** 21,900
Buildings 112,000
Cash 5,100
* (5% × $112,000 = $5,600; $5,600 × 17 = $95,200)
** ($112,000 - $95,200) + $5,100
Mar. 10 Accumulated Depreciation-Machinery *11,200
Cash ($2,900 - $300) 2,600
Machinery 16,000
* (70% × $16,000 = $11,200)
** ($16,000 - $11,200) + $300 - $2,900
Mar. 20 Machinery 3,000
Cash 3,000
May 18 Machinery 5,500
Accumulated Depreciation-Machinery * 2,400
Cash 5,500
Machinery 4,000
* (60% × $4,000 = $2,400)
** ($4,000 - $2,400)
June 23 Building Maintenance and Repairs Expense 6,900
Cash 6,900
******************************************************************************************
E10-25
(Analysis of Subsequent Expenditures)
Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for
properly. Any errors will affect both the balance sheets and income statements for a number of years.
For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E)
in the period incurred.
(a) Improvement. C
(b) Replacement of a minor broken part on a machine. (assuming immaterial) E
(c) Expenditure that increases the useful life of an existing asset. C
(d) Expenditure that increases the efficiency and effectiveness of a productive C
asset but does not increase its residual value.
(e) Expenditure that increases the efficiency and effectiveness of a productive C
asset and increases the asset's residual value.
(f) Ordinary repairs E
(g) Improvement to a machine that increased its fair market value and its C
production capacity by 30% without extending the machine's useful life.
(h) Expenditure that increases the quality of the output of the productive asset. C
******************************************************************************************
E10-26
(Entries for Disposition of Assets)
On December 31, 2010, Chrysler Inc. has a machine with a book value of $940,000. The original cost and
related accumulated depreciation at this date are as follows.
Machine $1,300,000
Book value $940,000
Depreciation is computed at $72,000 per year on a straight-line basis.
E10-26
A fire completely destroys the machine on August 31, 2011. An insurance settlement of $630,000 was
received for this casualty. Assume the settlement was received immediately. (List multiple debit/credit
entries from largest to smallest amount, e.g. 10, 5, 2.)

Accumulated Depreciation—Machine 48,000
Cash 630,000
Loss on Disposal of Machine 262,000
Machine 1,300,000
(To record disposal of machine.)

Depreciation Expense (8/12 × $72,000) 48,000
Accumulated Depreciation-Machine 48,000
Cash 630,000
Accumulated Depreciation-Machine ($360,000 + $48,000) 408,000
Loss on Disposal of Machine [($1,300,000 - $408,000) - $630,000] 262,000
Machine 1,300,000
E10-26
On July 31, 2011, the company donated this machine to the Mountain King City Council. The fair value of
the machine at the time of the donation was estimated to be $1,100,000. (List multiple debit/credit entries

Contribution Expense 1,100,000
Machine 1,300,000
Gain on Disposal of Machine 202,000
(To record disposal of machine.)

Depreciation Expense (7/12 × $72,000) 42,000
Accumulated Depreciation-Machine 42,000
Contribution Expense 1,100,000
Accumulated Depreciation-Machine ($360,000 + $42,000) 402,000
Machine 1,300,000
Gain on Disposal of Machine [$1,100,000 - ($1,300,000 - $402,000)] 202,000
******************************************************************************************
E10-27
(Disposition of Assets)
On April 1, 2010, Pavlova Company received a condemnation award of $410,000 cash as compensation for
the forced sale of the company's land and building, which stood in the path of a new state highway. The land
and building cost $60,000 and $280,000, respectively, when they were acquired. At April 1, 2010, the
accumulated depreciation relating to the building amounted to $160,000. On August 1, 2010, Pavlova
purchased a piece of replacement property for cash. The new land cost $90,000, and the new building cost
$380,000.
Prepare the journal entries to record the transactions on April 1 and August 1, 2010. (List multiple

April 1 Cash 410,000
Accumulated Depreciation—Building 160,000
Building 280,000
Gain on Disposal of Plant Assets 230,000
Land 60,000
Aug. 1 Building 380,000
Land 90,000
Cash 470,000

April 1 Cash 410,000
Accumulated Depreciation-Building 160,000
Building 280,000
Gain on Disposal of Plant Assets * 230,000
Land 60,000
Aug. 1 Building 380,000
Land 90,000
Cash 470,000
* Computation of gain:
Book value of land $ 60,000
Book value of buildings ($280,000 -
120,000
$160,000)
Book value of land and building 180,000
Cash received 410,000
Gain on disposal $230,000

A311Chapter 10 Problems

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E10-2

(Acquisition Costs of Realty)

Cost of land $489,050

The allocation of costs would be as follows:

(Acquisition Costs of Realty)

Land Land Improvements Building Other Accounts

(Acquisition Costs of Trucks)

Description/Account Debit Credit

(Purchase and Self-Constructed Cost of Assets)

Purchase equipment €124,100

(Treatment of Various Costs)

(Correction of Improper Cost Entries)

Plant acquisitions for selected companies are as follows.

Description/Account Debit Credit

€2,000,000 12% €240,000

1,800,000 10.38% 186,840

Construction loan €2,000,000 × 12% €240,000

Short-term loan €1,600,000 × 10% 160,000

Long-term loan €1,000,000 × 11% 110,000

Computation of Weighted-Average Accumulated Expenditures

Description/Account Debit Credit

Description/Account Debit Credit

Interest revenue $2,500

Computation of Weighted-Average Accumulated Expenditures

July 31 $300,000 3/12 $75,000

Interest Revenue $100,000 × 10% × 3/12 = $2,500

Interest capitalized $6,500 ($9,000 – $2,500)

Date Description/Account Debit Credit

Date Description/Account Debit Credit

The following three situations involve the capitalization of interest.

Weighted-Average Accumulated Expenditures × Interest Rate = Avoidable Interest

($900,000 × 0.10 = $90,000) - $50,000 Investment Income

(Entries for Equipment Acquisitions)

Description/Account Debit Credit

(Entries for Asset Acquisition, Including Self-Construction)

Below are transactions related to Impala Company.

Description/Account Debit Credit

Description/Account Debit Credit

** Fixed overhead applied (60% × $16,000) $9,600

(Entries for Acquisition of Assets)

Presented below is information related to Rommel Company.

Repairs to building $105,000

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

(Purchase of Computer with Zero-Interest-Bearing Debt)

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Description/Account Debit Credit

Schedule of Weighted Average Accumulated Expenditures

Description/Account Debit Credit

Description/Account Debit Credit