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Chapter 10: Q9Q (page 531)
Question: Provide examples of assets that do not qualify for interest capitalization
Answer
Examples of assets do not qualify for interest capitalization:
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Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.
Marshall Const. | Brigham Mfg. Co. | |
Fair value of old crane | \( 82,000 | |
Fair value of new crane | \)200,000 | |
Cash paid | 118,000 | |
Cash received | 118,000 |
Instructions
(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.
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 | 15,000 |
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 suppliers | 44,000 |
Instructions
Prepare journal entries on the books of Duffner Company to record these transactions.
(Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.
| Schedule of Property Dispositions | |||||
Cost | Accumulated Depreciation | Cash Proceeds | Fair Value | Nature of Disposition | |
Land | \(40,000 | 鈥� | \)31,000 | \(31,000 | Condemnation |
Building | 15,000 | 鈥� | 3,600 | 鈥� | Demolition |
Warehouse | 70,000 | \)16,000 | 74,000 | 74,000 | Destruction by fire |
Machine | 8,000 | 2,800 | 900 | 7,200 | Trade-in |
Furniture | 10,000 | 7,850 | 鈥� | 3,100 | Contribution |
Automobile | 9,000 | 3,460 | 2,960 | 2,960 | Sale |
The following additional information is available.
Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased for \(35,000.
Building: On April 2, land and building were purchased at a total cost of \)75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.
Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated \(16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of \)90,000.
Machine: On December 26, the machine was exchanged for another machine having a fair value of \(6,300 and cash of \)900 was received. (The exchange lacks commercial substance.)
Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.
Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.
Instructions
Indicate how these items would be reported on the income statement of Hollerith Co.
(Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.
Construction loan鈥�12% interest, payable semiannually, issued December 31, 2016 | \)2,000,000 |
Short-term loan鈥�10% interest, payable monthly, and principal payable at maturity on May 30, 2018 | 1,400,000 |
Long-term loan鈥�11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 | 1,000,000 |
Instructions
(Carry all computations to two decimal places.)
(A) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of \(5,200,000, and the weighted-average amount of accumulated expenditures was \)3,600,000. Compute the avoidable interest on this project.
(B) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.
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