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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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(Analysis of Subsequent Expenditures) The following transactions occurred during 2017. 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 salvage 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 \(132,000 in 2000 is torn down to make room for a
New building. The wrecking contractor was paid \)5,100 and was
permitted to keep all materials salvaged.
Mar. 10 Machinery that was purchased in 2010 for \(16,000 is sold for \)2,900
cash, f.o.b. purchaser鈥檚 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 2009. The gear is
replaced at a cost of \(2,000. The replacement does not extend the
useful life of the machine but does make the machine more efficient.
May 18 A special base installed for a machine in 2011 when the machine was
purchased has to be replaced at a cost of \)5,500 because of defective
workmanship on the original base. The cost of the machinery was
\(14,200 in 2011. The cost of the base was \)3,500, and this amount was
charged to the Machinery account in 2011.
June 23 One of the buildings is repainted at a cost of $6,900. It had not been
painted since it was constructed in 2013.
Instructions
Prepare general journal entries for the transactions. (Round to the nearest dollar.)
(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,
and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.
(a) Money borrowed to pay building contractor (signed a note) \((275,000)
(b) Payment for construction from note proceeds 275,000
(c) Cost of land fill and clearing 8,000
(d) Delinquent real estate taxes on property assumed by purchaser 7,000
(e) Premium on 6-month insurance policy during construction 6,000
(f) Refund of 1-month insurance premium because construction completed early (1,000)
(g) Architect鈥檚 fee on building 22,000
(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000
(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
Instructions
Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be
reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.
Item Land Land Improvements Buildings Other Accounts
Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
Question: Mickelson Inc. owns land that it purchased on January 1, 2000, for \(450,000. At December 31, 2017, its current value is \)770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain
(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?
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