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Chapter 10: Q1BE (page 532)
Previn Brothers Inc. purchased land at a price of \(27,000. Closing costs were \)1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?
$38,600
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(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.
Instructions
(Round to two decimal places.)
Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)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. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 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鈥檚 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. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.
(Capitalization of Interest) Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2012. Laserwords鈥� original facility became obsolete by early 2017 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.
On June 1, 2017, Laserwords contracted with Black Construction to have a new building constructed for \(4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.
Date | Amount |
July 30, 2017 | \) 900,000 |
January 30, 2018 | 1,500,000 |
May 30, 2018 | 1,600,000 |
Total payments | \(4,000,000 |
Construction was completed and the building was ready for occupancy on May 27, 2018. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year
10%, 5-year note payable of \)2,000,000, dated April 1, 2014, with interest payable annually on April 1.
12%, 10-year bond issue of $3,000,000 sold at par on June 30, 2010, with interest payable annually on June 30.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.
Instructions
(Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.
In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay \(93,000 in addition to trading in its old machine.
Holyfield | Dorsett | Winston | Liston | Greeley | |
Machine cost | \)160,000 | \(120,000 | \)152,000 | \(160,000 | \)130,000 |
Accumulated depreciation | 60,000 | 45,000 | 71,000 | 75,000 | 鈥�0鈥� |
Fair value | 92,000 | 69,000 | 92,000 | 95,000 | 185,000 |
Instructions
For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.
Hanson Company (see BE10-2) borrowed \(1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, \)2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.
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