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Chapter 10: 1BE (page 502)
Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.
$38,600 the prior
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What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.
(Capitalization of Interest) The following three situations involve the capitalization of interest
Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of \(4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed \)4,000,000 payable in 10 annual installments of \(400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling \)1,500,000 under the contract; the weighted average amount of accumulated expenditures was \(800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of \)250,000.
Instructions
What amount should Oksana Baiul report as capitalized interest at December 31, 2017?
Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Interest Costs Incurred | |
Warehouse constructed for Ito鈥檚 own use | \(30,000 |
Special-order machine for sale to unrelated customer, produced according to customer鈥檚 specifications | 9,000 |
Inventories routinely manufactured, produced on a repetitive basis | 8,000 |
All of these assets required an extended period of time for completion.
Instructions
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed \)10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled \(7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to \)650,000 for the year.
Instructions
How much should be shown as capitalized interest on Peggy Fleming鈥檚 financial statements on April 30, 2018?
What are the general rules for how gains or losses on retirement of plant assets should be reported in income?
Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.
(Acquisition, Improvements, and Sale of Realty) Tonkawa Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. Furthermore, a substantial amount of rock blasting and removal had to be done to the site before construction of the building foundation began. Because the office building was set back on the land far from the public road, Tonkawa Company had the contractor construct a paved road that led from the public road to the parking lot of the office building.
Three years after the office building was occupied, Tonkawa Company added four stories to the office building. The four stories had an estimated useful life of 5 years more than the remaining estimated useful life of the original office building.
Ten years later, the land and building were sold at an amount more than their net book value, and Tonkawa Company had a new office building constructed in another state for use as its new corporate headquarters.
Instructions
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