Ch 10 Solution

(1)

© The McGraw-Hill Companies, Inc., 2009

Solutions Manual, Vol.1, Chapter 10 10-1

Exercise 10-1

Capitalized cost of land:

Purchase price $60,000

Demolition of old building $4,000

Less: Sale of materials (2,000) 2,000 Legal fees for title investigation 2,000

Total cost of land $64,000

Capitalized cost of building:

Construction costs $500,000

Architect's fees 12,000

Interest on construction loan 5,000 Total cost of building $517,000

Note: Property taxes on the land for the period after acquisition are not part of acquisition cost. They are expensed in the period incurred.

Exercise 10-2

To record the purchase of a machine.

Machine ($45,000 + 2,200 + 700 + 1,000) ... 48,900

Accounts payable ... 47,200 Cash ... 1,700

To record prepaid insurance for the machine.

Prepaid insurance ... 900

Cash ... 900

(2)

10-2 Intermediate Accounting, 5/e

Requirement 1

Cost of land and building:

Purchase price $4,000,000

Title search and insurance 16,000

Legal fees 5,000

State transfer fees 4,000 Total cost $4,025,000

Note: The pro-rated property taxes for the period after acquisition are not included in the initial valuation of the land and building. They are recorded instead as prepaid taxes and expensed over the related period.

The total is allocated to the land and building based on their relative fair values:

Asset Fair Value

Percent of Total Fair Value Initial Valuation (Percent x $4,025,000) Land $3,300,000 75% $3,018,750 Building 1,100,000 25 1,006,250 $4,400,000 100% $4,025,000 Assets: Land $3,018,750 Building 1,006,250 Land improvements: Parking lot 82,000 Landscaping 40,000

(3)

Requirement 2

Cost of land:

Purchase price $4,000,000 Title search and insurance 16,000

Legal fees 5,000

State transfer fees 4,000 Demolition of old building $250,000

Less: Sale of materials (6,000) 244,000 Clearing and grading costs 86,000 Total cost of land $4,355,000 Land improvements:

Parking lot 82,000

(4)

Requirement 1

Cost of copper mine:

Mining site $1,000,000 Development costs 600,000 Restoration costs 303,939 † $1,903,939 † $300,000 x 25% = $ 75,000 400,000 x 40% = 160,000 600,000 x 35% = 210,000 $445,000 x .68301* = $303,939

*Present value of $1, n = 4, i = 10% (from Table 2)

Requirement 2

Copper mine (determined above) ... 1,903,939

Cash ($1,000,000 + 600,000) ... 1,600,000 Asset retirement liability (determined above) ... 303,939 Equipment (cost) ... 120,000

(5)

Organization cost expense ($12,000 + 3,000) ... 15,000

Patent ($20,000 + 2,000) ... 22,000 Pre-opening expenses ... 40,000 Furniture ... 30,000 Cash ... 107,000

Exercise 10-6

Calculation of goodwill: Consideration exchanged $17,000,000 Less fair value of net assets:

Assets $23,000,000

Less: Liabilities assumed (9,500,000) (13,500,000)

Goodwill $ 3,500,000

Exercise 10-7

Calculation of goodwill:

Consideration exchanged $11,000,000 Less fair value of net assets:

Book value of net assets $7,800,000 Plus: Fair value in excess of book value:

Property, plant, and equipment 1,400,000 Intangible assets 1,000,000 Less: Book value in excess of fair value:

Receivables (200,000) 10,000,000

(6)

Percent of Total Fair Value Initial Valuation (Percent x $900,000) Land ... $ 300,000 30% $270,000 Building A ... 450,000 45 405,000 Building B ... 250,000 25 225,000 $1,000,000 100% $900,000

(7)

Requirement 1

Tractor ($5,000 cash + 18,783†_{present value of note)}_{... 23,783}

Discount on note payable (difference) ... 6,217

Cash ... 5,000 Note payable (face amount) ... 25,000

† Present value of note payment:

PV = $25,000 (.75131* ) = $18,783

* Present value of $1: n = 3, i = 10% (from Table 2)

Requirement 2 2009: Interest expense ($18,783 x 10%) = $1,878 2010: Interest expense [($18,783 + 1,878) x 10%] = 2,066 Requirement 3 2009: $25,000 – ($6,217 – 1,878) = $20,661 2010: $25,000 – ($6,217 – 1,878 – 2,066) = 22,727

(8)

Purchase price $1,200,000

Demolition and removal of old building 80,000 Clearing and grading 150,000

Closing costs 42,000

Total cost of land $1,472,000 Building:

Architect’s fees $ 50,000 Construction costs 3,250,000 Total cost of building $3,300,000 Machinery:

Purchase price $860,000

Freight charges 32,000

Special platforms and wire installation 12,000 Cost of trial runs 7,000 Total cost of machinery $911,000 Land improvements:

Landscaping $45,000

Sprinkler system 5,000

Fork lifts:

PV = $16,000 + 70,000 (.93458* ) = $81,421

(9)

To record the acquisition of land in exchange for common stock.

February 1, 2009

Land ... 90,000

Common stock (5,000 shares x $18) ... 90,000

To record the acquisition of a building through purchase and donation.

November 2, 2009

Building ... 600,000

Cash ... 400,000 Revenue - donation of asset(difference) ... 200,000

Exercise 10-12

Requirement 1

($ in millions)

Average PP&E for 2007 = ($3,893 + 3,440) ÷ 2 = $3,666.5 Net sales ÷ Average PP&E = Fixed-asset turnover ratio $34,922 ÷ $3,666.5 = 9.52

Requirement 2

The fixed-asset turnover ratio indicates the level of sales generated by the company’s investment in fixed assets. Cisco is able to generate $9.52 in sales for every $1 invested in property, plant, and equipment.

(10)

Requirement 1

Cash ... 3,000 Accumulated depreciation - tractor (account balance) ... 26,000 Loss on sale of tractor (difference) ... 1,000

Tractor(account balance) ... 30,000 Requirement 2

Cash ... 10,000 Accumulated depreciation - tractor (account balance) ... 26,000

Tractor (account balance) ... 30,000

Gain on sale of tractor (difference) ... 6,000

Exercise 10-14

Equipment - new ($200,000 + 60,000) ... 260,000

Accumulated depreciation (account balance) ... 220,000

Cash ... 60,000 Equipment - old (account balance) ... 400,000

Gain ($200,000 - 180,000) ... 20,000

Exercise 10-15

Equipment - new($170,000 + 60,000) ... 230,000 Loss ($180,000 - 170,000) ... 10,000

Accumulated depreciation (account balance) ... 220,000

Cash ... 60,000 Equipment - old (account balance) ... 400,000

(11)

Requirement 1

Fair value of land + Cash given = Fair value of equipment

$150,000 + 10,000 = $160,000

Requirement 2

Equipment($150,000 + 10,000) ... 160,000

Cash ... 10,000 Land (book value)... 120,000

Gain($150,000 - 120,000) ... 30,000

Exercise 10-17

Requirement 1

Fair value of land - Cash received = Fair value of equipment

$150,000 - 10,000 = $140,000

Requirement 2

Equipment($150,000 - 10,000) ... 140,000

Cash ... 10,000

Land (book value)... 120,000

(12)

Requirement 1

Fair value of old land + Cash given = Fair value of new land

$72,000 + 14,000 = $86,000

Requirement 2

Land–new ($72,000 + 14,000) ... 86,000

Cash ... 14,000 Land - old (book value) ... 30,000

Gain ($72,000 – 30,000) ... 42,000 Requirement 3

Land–new ($30,000 + 14,000) ... 44,000

Cash ... 14,000 Land - old (book value) ... 30,000

(13)

1. To record the purchase of equipment on account.

Equipment ($25,000 x 98%) ... 24,500

Accounts payable ... 24,500

2. To record the acquisition of equipment in exchange for a note.

Equipment (determined below) ... 24,545

Discount on note payable (difference) ... 2,455

Note payable(face amount) ... 27,000 PV = $27,000 (.90909* ) = $24,545

* Present value of $1: n=1, i=10% (from Table 2)

3. To record the exchange of old equipment for new equipment.

Equipment - new($2,500 + 22,000) ... 24,500 Loss ($6,000 - 2,500) ... 3,500

Accumulated depreciation ... 8,000

Cash ... 22,000 Equipment - old ... 14,000

4. To record the acquisition of equipment by the issuance of stock.

Equipment ... 24,000

(14)

$6,000,000 = $3,000,000 2 Interest capitalized: $3,000,000 - 1,500,000 x 10% = $150,000 1,500,000 x 7%* = 105,000 $255,000 = interest capitalized

* Weighted-average rate of all other debt:

$2,000,000 x 9% = $180,000 4,000,000 x 6% = 240,000 $6,000,000 $420,000 $420,000 = 7% $6,000,000

Exercise 10-21

Average accumulated expenditures for 2009:

January 2, 2009 $500,000 x 12/12 = $ 500,000 March 1, 2009 600,000 x 10/12 = 500,000 July 31, 2009 480,000 x 5/12 = 200,000 September 30, 2009 600,000 x 3/12 = 150,000 December 31, 2009 300,000 x 0/12 = - 0 - $1,350,000 Interest capitalized: $1,350,000 x 8% = $108,000

(15)

Exercise 10-22

Average accumulated expenditures for 2009:

January 2, 2009 $ 600,000 x 12/12 = $ 600,000 March 31, 2009 1,200,000 x 9/12 = 900,000 June 30, 2009 800,000 x 6/12 = 400,000 September 30, 2009 600,000 x 3/12 = 150,000 December 31, 2009 400,000 x 0/12 = - 0 - $2,050,000 Interest capitalized: $2,050,000 - 1,500,000 x 8.0% = $120,000 550,000 x 10.5%* = 57,750 $177,750 = interest capitalized

$5,000,000 x 12% = $600,000 3,000,000 x 8% = 240,000 $8,000,000 $840,000 $840,000 = 10.5% $8,000,000

Exercise 10-23

IAS No. 23, as originally issued, allowed a company to choose between (1)

capitalization and (2) immediate expensing of interest incurred during the construction period. In 2007, IAS No. 23 was revised to require capitalization of interest. So, Highlands Company must capitalize $177,750 in interest as with U.S. GAAP.

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Research and development expense (below) ... 3,180,000

Patent ... 3,180,000

Research and development expenditures:

Basic research to develop the technology $2,000,000 Engineering design work 680,000 Development of a prototype 300,000 Testing and modification of the prototype 200,000

Total $3,180,000

To capitalize cost of equipment incorrectly capitalized as patent.

Patent ... 60,000 To record depreciation on equipment used in R&D projects.

Research and development expense ... 10,000

(17)

Research and development expense:

Salaries and wages for lab research $ 400,000 Materials used in R&D projects 200,000 Fees paid to outsiders for R&D projects 320,000 Depreciation on R&D equipment 120,000

Total $1,040,000

The patent filing and legal costs are capitalized as the cost of the patent. The salaries, wages, and supplies for R&D performed for another company are included as inventory and expensed as cost of goods sold using either the completed contract or percentage-of-completion method.

(18)

List A List B

f 1. Depreciation a. Exclusive right to display a word, a symbol, or an

emblem.

d 2. Depletion b. Exclusive right to benefit from a creative work. i 3. Amortization c. Operational assets that represent rights.

g 4. Average accumulated d. The allocation of cost for natural resources.

expenditures

h 5. Revenue - donation of asset e. Purchase price less fair value of net

identifiable assets.

j 6. Nonmonetary exchange f. The allocation of cost for plant and equipment. k 7. Natural resources g. Approximation of average amount of debt if all

construction funds were borrowed.

c 8. Intangible assets h. Account credited when assets are donated to a

corporation.

b 9. Copyright i. The allocation of cost for intangible assets.

a 10. Trademark j. Basic principle is to value assets acquired using fair

value of assets given.

(19)

Requirement 1

($ in millions)

Research and development expense ... 4 Software development costs ... 2

Cash ... 6 Requirement 2 (1) Percentage-of-revenue method: $4,000,000 = 40% x $2,000,000 = $800,000 $10,000,000 (2) Straight-line method: 1/5 or 20 % x $2,000,000 = $400,000.

The percentage-of-revenue method is used since it produces the greater amortization, $800,000.

Requirement 3

Software development costs $2,000,000 Less: Amortization to date (800,000)

(20)

Requirement 1 Oil wells ... 450,000 Cash ... 450,000 Requirement 2 Oil wells ($50,000 + 60,000 + 80,000) ... 190,000 Exploration expense ... 260,000 Cash ... 450,000

(21)

CPA / CMA REVIEW QUESTIONS

CPA Exam Questions

1. d. Simons Company should value the land at $170,500. All expenditures

incurred to purchase land should be part of the capitalized asset. $150,000 + ($150,000 x .07) + $5,000 + $5,000

2. c. Costs attributable to land: $60,000 + $2,000 + $5,000 - $3,000 = $64,000

Costs attributable to building: $8,000 + $350,000 = $358,000

3. d. There are eight payments due, the first one due immediately, and the remaining seven due each year on December 31. Therefore, the correct factor to use is the present value of an annuity in advance (annuity due) for 8 periods, or 5.712 x $20,000 = $114,240, the present value at the inception of the note and therefore the initial value of the machine. Another way to

calculate the answer is to view the annuity as a 7 period ordinary annuity, with a down payment today of $20,000. This would yield a calculation of $20,000 + ($20,000 x 4.712) or $114,240.

4. b. The recorded cost of the new asset is equal to the fair value of the asset given up, $20,000. In this case, there are two new assets acquired, new truck, $15,000, and cash, $5,000. The gain on the trade is $8,000 (FV old truck $20,000 - $12,000 book value).

5. c. Dahl Corporation should capitalize the materials, engineering fees, and labor and electricity for construction and testing: ($20,000 + $5,000 + $3,000 + $1,000 + $1,000 + $1,000). The labor and electricity to run the machine should not be capitalized. These should be expensed because they are not part of the construction costs and were not incurred prior to activating the asset.

(22)

6. b. The interest cost capitalized is the lesser of the formula amount based on average accumulated expenditures or the actual interest cost incurred. In this case the formula amount ($40,000) is the smaller amount and should be the amount capitalized as part of the cost of the building.

7. a. Amortization of capitalized software is the lesser of the amount calculated using the percentage-of-revenue method and the straight-line method. In this case, the straight-line percentage is 20% (1/5) and the percentage-of-revenue method is 30%. Therefore, we amortize 30% of the cost yielding book value of 70%.

8. d. All of the expenditures are considered research and development.

CMA Exam Questions

1. a. The costs of fixed assets (plant and equipment) are all costs necessary to acquire these assets and to bring them to the condition and location required for their intended use. These costs include shipping, installation, pre-use testing, sales taxes, interest, capitalization, etc. The original cost of the machinery to be recorded in the books is the sum of the purchase price, installation, and delivery charges.

2. d. SFAS No. 153, ―Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29‖, states that the basic principle to be followed in these

exchanges is to value the asset received at fair value and to recognize gain or loss (the difference between the fair value and the book value of the asset given up). Harper’s used machine has a book value of $64,000 ($162,500 cost - $98,500 accumulated depreciation). The fair value of the used

machine is $80,000 resulting in a gain of $16,000 ($80,000 – 64,000). The only exceptions to using fair value are (1) when fair value is not

determinable and (2) when the exchange lacks commercial substance. 3. c. The answer is the same as question 2.

(23)

Problem 10-1

1. To record the acquisition of land and building.

Land (determined below) ... 62,500

Building (determined below) ... 37,500

Cash ... 100,000

Percent of Total Fair Value Initial Valuation (Percent x $100,000) Land $ 75,000 62.5% $ 62,500 Building 45,000 37.5 37,500 $120,000 100.0% $100,000

2. To record the acquisition of equipment for cash and a note.

Equipment (determined below) ... 37,037 Discount on note payable (difference) ... 2,963

Note payable (face amount) ... 40,000 Present value of note payments:

PV = $40,000 (.92593* ) = $37,037

* Present value of $1: n = 1, i=8% (from Table 2)

3. To record the acquisition of a truck by donation.

Truck ... 2,500

Revenue - donation of asset ... 2,500

(24)

4. To capitalize organization costs.

Organization cost expense ... 3,000

Cash ... 3,000

5. To record the purchase of machinery.

Machinery ($15,000 + 500) ... 15,500

Cash ... 15,500

6. To record the acquisition of office equipment by the issuance of common

stock.

Office equipment ... 5,500

Common stock ... 5,500

7. To record the acquisition of land in exchange for cash and a note.

Land ... 20,000

Cash ... 2,000 Note payable ... 18,000

(25)

Requirement 1

Blackstone Corporation

LAND ACCOUNT (Site Number 11) As of September 30, 2010

Acquisition cost $600,000

Real estate broker’s commission 36,000

Legal fees 6,000

Title insurance 18,000

Cost of razing existing building 75,000 Balance, September 30, 2010 $735,000

Requirement 2

Blackstone Corporation

CAPITALIZED COST OF OFFICE BUILDING As of September 30, 2010

Contract cost $3,000,000

Plans, specifications, and blueprints 12,000 Architects’ fees for design and supervision 95,000 Capitalized interest for 2009:

$900,000 x 14% x 10/12 105,000 Capitalized interest for 2010:

$2,300,000 x 14% x 9/12 241,500 Total capitalized cost, September 30, 2010 $3,453,500

(26)

Requirement 1

Pell Corporation

ANALYSIS OF CHANGES IN PLANT ASSETS For the Year Ended December 31, 2009

Balance Balance 12/31/08 Increase Decrease 12/31/09 Land $ 350,000 $438,000 [1] $ 788,000 Land improvements 180,000 180,000 Building 1,500,000 1,500,000 Machinery and equipment 1,158,000 287,000 [2] $58,000 1,387,000 Automobiles 150,000 19,000 [3] 18,000 151,000 Totals $3,338,000 $744,000 $76,000 $4,006,000 Explanation of Amounts:

[1] Cost of land acquired 11/1/09:

Pell stock exchanged (10,000 shares x $38) $380,000 Legal fees and title insurance 23,000 Razing existing building 35,000 $438,000

[2] Cost of machinery and equipment purchased 1/2/09:

Invoice cost $260,000

Installation cost 27,000

$287,000

[3] Cost recorded for new automobile 12/31/09:

Fair value of trade-in $ 3,750

Cash paid 15,250

(27)

Requirement 2

Pell Corporation

GAIN OR LOSS FROM PLANT ASSET DISPOSALS For the Year Ended December 31, 2009

Sale of machine on 3/31/09:

Selling price $36,500

Less: Book value of machine ($58,000 - 24,650) (33,350)

Gain on sale of machine $ 3,150 Trade-in of automobile on 12/31/09:

Book value of trade-in ($18,000 - 13,500) $ 4,500 Less: Fair value of trade-in (3,750)

(28)

To reclassify various expenditures incorrectly charged to the intangible asset account.

Organization cost expense ... 7,000 Prepaid insurance ... 6,000 Copyright ... 20,000 Research and development expense ... 40,000 Patent($3,000 + 12,000) ... 15,000

Franchise ... 40,000 Advertising expense ... 16,000

Intangible asset ... 144,000 To reclassify amount paid for Stiltz Corp. incorrectly charged to the intangible asset account.

Receivables ... 100,000 Equipment ... 350,000 Patent ... 150,000 Goodwill (determined below) ... 120,000

Note payable ... 220,000 Intangible asset ... 500,000

Calculation of goodwill:

Consideration exchanged $500,000 Less: Fair value of net assets (380,000)

(29)

1. To expense R&D costs.

Cash ... 12,000

2. To expense legal fees for unsuccessful defense of patent.

Legal fees expense ... 7,500

Cash ... 7,500

3. To capitalize the cost of equipment.

Equipment (cash price)... 23,000 Discount on note payable (difference) ... 1,000

Cash (amount paid) ... 6,000

Note payable (face amount) ... 18,000 4. To capitalize cost of the sprinkler system.

Building - sprinkler system ... 28,000

Cash ... 28,000

5. To capitalize legal fees for successful defense of patent.

Patent ... 12,000

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6. To record the trade-in of an old machine for a new machine.

Machine - new ($2,000* + 8,000) ... 10,000

Accumulated depreciation - machine ($7,400 - 3,000) ... 4,400

Loss on trade-in($3,000 – 2,000*) ... 1,000

Cash ... 8,000 Machine - old ... 7,400

*Fair value of old machine (Fair value of new machine - Cash given): $10,000 - 8,000 = $2,000

(31)

Southern Company:

Cash ... 140,000 Building - new($1,400,000 - 140,000) ... 1,260,000

Accumulated depreciation - building (account balance) .... 1,200,000

Building - old (account balance) ... 2,000,000

Gain ($1,400,000 – 800,000) ... 600,000

Eastern Company:

The fair value of Eastern’s building is $1,260,000 ($1,400,000 fair value of Southern’s building less $140,000 cash given).

Building - new($1,260,000 + 140,000) ... 1,400,000

Accumulated depreciation - building (account balance) .... 650,000

Cash ... 140,000 Building - old (account balance) ... 1,600,000

(32)

Robers:

Cash ... 5,000 Newasset($75,000 - 5,000) ... 70,000

Accumulated depreciation - old asset (account balance) .... 55,000

Old asset (account balance) ... 120,000

Gain on exchange of assets ($75,000 – 65,000) ... 10,000

Phifer:

New asset ($70,000 + 5,000)... 75,000 Accumulated depreciation - old asset (account balance) .... 63,000

Loss ($77,000 – 70,000) ... 7,000

Cash ... 5,000 Old asset (account balance) ... 140,000

(33)

Requirement 1 2009: Expenditures for 2009: January 3, 2009 $1,000,000 x 12/12 = $1,000,000 March 1, 2009 600,000 x 10/12 = 500,000 June 30, 2009 800,000 x 6/12 = 400,000 October 1, 2009 600,000 x 3/12 = 150,000 Accumulated expenditures (before interest) - $3,000,000

Average accumulated expenditures - $2,050,000

Interest capitalized: $2,050,000 x 10% = $205,000 = Interest capitalized in 2009 2010: January 1, 2010 ($3,000,000 + 205,000) $3,205,000 x 9/9 = $3,205,000 January 31, 2010 270,000 x 8/9 = 240,000 April 30, 2010 585,000 x 5/9 = 325,000 August 31, 2010 900,000 x 1/9 = 100,000 Accumulated expenditures (before interest) - $4,960,000

Interest capitalized:

$3,870,000

- 3,000,000 x 10.0% x 9/12 = $225,000 870,000 x 7.2%* x 9/12 = 46,980

$271,980 = Interest capitalized in 2010

$ 4,000,000 x 6% = $240,000 $720,000

6,000,000 x 8% = 480,000 = 7.2% $10,000,000 $720,000 $10,000,000

(34)

Requirement 2

Accumulated expenditures 9/30/10

before interest capitalization (above) $4,960,000 2010 interest capitalized (above) 271,980

Total cost of building $5,231,980

Requirement 3

2009

$3,000,000 x 10% = $ 300,000 4,000,000 x 6% = 240,000 6,000,000 x 8% = 480,000 Total interest incurred 1,020,000 Less: Interest capitalized (205,000) 2009 interest expense $ 815,000

2010

Total interest incurred $1,020,000 Less: Interest capitalized (271,980) 2010 interest expense $ 748,020

(35)

Requirement 1 2009 Expenditures for 2009 January 3, 2009 1,000,000 x 12/12 = $1,000,000 March 1, 2009 600,000 x 10/12 = 500,000 June 30, 2009 800,000 x 6/12 = 400,000 October 1, 2009 600,000 x 3/12 = 150,000 Accumulated expenditures (before interest) — $3,000,000

$2,050,000 x 7.85%* = $160,925 = Interest capitalized in 2009

* Weighted-average rate of all debt:

$ 3,000,000 x 10% = $ 300,000 $1,020,000 4,000,000 x 6% = 240,000 = 7.85% (rounded) 6,000,000 x 8% = 480,000 $13,000,000 $13,000,000 $1,020,000 2010: January 1, 2010 ($3,000,000 + 160,925) $3,160,925 x 9/9 = $3,160,925 January 31, 2010 270,000 x 8/9 = 240,000 April 30, 2010 585,000 x 5/9 = 325,000 August 31, 2010 900,000 x 1/9 = 100,000 Accumulated expenditures (before interest) — $4,915,925

(36)

Requirement 2

Accumulated expenditures 9/30/10,

before interest capitalization (above) $4,915,925 2010 interest capitalized (above) 225,251

Total cost of building $5,141,176

Requirement 3

2009:

$3,000,000 x 10% = $ 300,000 4,000,000 x 6% = 240,000 6,000,000 x 8% = 480,000 Total interest incurred 1,020,000 Less: Interest capitalized (160,925) 2009 interest expense $ 859,075

2010:

Total interest incurred $1,020,000 Less: Interest capitalized (225,251) 2010 interest expense $ 794,749

(37)

To capitalize the cost of equipment to be used on future projects incorrectly charged to R&D expense.

Research and development expense ... 400,000 To record depreciation on equipment used in R&D projects.

$400,000 ÷ 5 years = $80,000

Accumulated depreciation - equipment ... 80,000

To capitalize filing and legal fees for patent incorrectly charged to R&D expense. Patent ... 40,000

To reclassify the expenditures made for quality control during commercial production.

Inventory* ... 20,000

*Quality control costs would either be treated as manufacturing overhead and

included in the cost of inventory (as in this journal entry), or expensed in the

(38)

Requirement 1

Land

Purchase price (determined below) $714,404

Closing costs 20,000

Removal of old building 70,000 Clearing and grading 50,000

$854,404

Purchase price of land:

Cash paid $200,000 Value of note† _514,404

$714,404

† _{Present value of note payment:}

PV = $600,000 (.85734* ) = $514,404

Land improvements

Parking lot and landscaping $285,000

Building Construction expenditures: May 30 $1,200,000 July 30 1,500,000 September 1 900,000 October 1 1,800,000 Total expenditures 5,400,000 Interest capitalized (determined below) 94,000 Total cost of building $5,494,000

(39)

Average accumulated expenditures:

May 31, 2009 $1,200,000 x 5/6 = $ 1,000,000 July 30, 2009 1,500,000 x 3/6 = 750,000 September 1, 2009 900,000 x 2/6 = 300,000 October 1, 2009 1,800,000 x 1/6 = 300,000 $2,350,000 Interest capitalized: $2,350,000 x 8% x 6/12 = $94,000

Equipment and furniture and fixtures

Initial Percent of Total Valuation Fair Value Fair Value % x $600,000 Equipment $455,000 65% $390,000 Furniture & fixtures 245,000 35% 210,000 Totals $700,000 100% $600,000 Initial valuation:

Equipment $390,000

Furniture & fixtures 210,000 Requirement 2

Interest expense:

Note issued to purchase land and building,

$514,404 x 8% x 9/12 = $ 30,864 Construction loan, $3,000,000 x 8% x 8/12 160,000 Long-term note, $2,000,000 x 9% 180,000 Long-term bonds, $4,000,000 x 6% 240,000

Total 610,864

Less: Interest capitalized (determined above) (94,000)