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Chapter 10: Q11Q (page 531)

Question: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?

Short Answer

Expert verified

Answer

Interest capitalized disclosed along with the interest expensed in the financial statement. Interest revenue from the temporary invested excess fund treat as

Step by step solution

01

Disclosure of interest capitalization

Company discloses the total interest in the notes to financial statement. Company discloses the interest capitalized and interest treated as expense separately.

02

Interest revenue of temporary invested excess fund

Company borrows the money to finance the construction of the assets. Company do not need the all borrowed fund in starting so company invest the excess fund as temporary investment. Company treats the interest revenue from this investment as normal interest revenue

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Most popular questions from this chapter

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company鈥檚 stock price to go down.

Instructions

Answer the following questions.

  1. What stakeholder interests are in conflict?
  2. What ethical issues does Carter face?
  3. How should these costs be allocated?

(Nonmonetary Exchange) Carlos Arruza Company exchanged equipment used in its manufacturing operations plus \(3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.

Carlos Arruza Co.

Tony LoBianco Co.

Equipment (cost)

\)28,000

$28,000

Accumulated depreciation

19,000

10,000

Fair value of equipment

12,500

15,500

Cash given up

3,000

Instructions

  1. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
  2. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

(Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.

  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres鈥檚 assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

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 250,000

Equipment 300,000

Cash 700,000

2. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300


3. Kim 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:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.


5. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

Question: Discuss the basic accounting problem that arises in handling each of the following situations. (a) Assets purchased by issuance of common stock. (b) Acquisition of plant assets by gift or donation. (c) Purchase of a plant asset subject to a cash discount. (d) Assets purchased on a long-term credit basis. (e) A group of assets acquired for a lump sum. (f) An asset traded in or exchanged for another asset.

Question: (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of \(10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

  1. Geddes paid cash for the equipment 8 days after the purchase. The vendor鈥檚 credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
  2. Geddes traded in equipment with a book value of \)2,000 (initial cost \(8,000), and paid \)9,500 in cash one month after the purchase. The old equipment could have been sold for \(400 at the date of trade. (The exchange has commercial substance.)
  3. Geddes gave the vendor a \)10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.

Instructions

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.
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