Ch 10 Assigned Homework Solutions EXERCISE 10 5 30 40 minutes Land Abstract fees Buildings M E Other 520 Architect s fees 3 170 Cash paid for land and old building 87 000 Removal of old building 20 000 5 500 14 500 Interest on loans during construction 7 400 Excavation before construction 19 000 Machinery purchased 53 900 Freight on machinery 1 340 1 100 Misc expense Discount Lost Storage charges caused by noncompletion of building 2 180 Misc expense Loss New building Assessment by city 485 000 1 600 Hauling charges machinery 620 Installation machinery Landscaping 2 000 Loss 5 400 109 020 514 570 57 240 Misc expense 3 900 EXERCISE 10 7 20 25 minutes a Avoidable Interest Weighted Average Accumulated Expenditures X Interest Rate Avoidable Interest 2 000 000 12 240 000 1 600 000 10 42 166 720 3 600 000 406 720 Weighted average interest rate computation Principal Interest 10 short term loan 1 400 000 140 000 11 long term loan 1 000 000 110 000 2 400 000 250 000 Total Interest Total Principal 250 000 2 400 000 10 42 EXERCISE 10 7 Continued b Actual Interest Construction loan 2 000 000 X 12 240 000 Short term loan 1 400 000 X 10 140 000 Long term loan 1 000 000 X 11 110 000 Total 490 000 Because avoidable interest is lower than actual interest use avoidable interest Cost 5 200 000 Interest capitalized 406 720 Total cost Depreciation Expense 5 606 720 5 606 720 300 000 30 years 176 891 EXERCISE 10 15 15 20 minutes a Equipment 86 861 85 Discount on Notes Payable 18 138 15 Cash 30 000 00 Notes Payable 75 000 00 PV of 15 000 annuity 10 for 5 years 15 000 X 3 79079 56 861 85 Down payment 30 000 00 Capitalized value of equipment b 86 861 85 Notes Payable 15 000 00 Interest Expense see schedule 5 686 19 Cash 15 000 00 Discount on Notes Payable 5 686 19 Year Note Payment 10 Interest Reduction of Principal 12 31 13 Balance 56 861 85 12 31 14 15 000 00 5 686 19 9 313 81 47 548 04 12 31 15 15 000 00 4 754 80 10 245 20 37 302 84 EXERCISE 10 15 Continued c Notes Payable 15 000 00 Interest Expense 4 754 80 Cash 15 000 00 Discount on Notes Payable 4 754 80 EXERCISE 10 19 15 20 minutes a Exchange lacks commercial substance Carlos Arruza Company Equipment 12 000 Accumulated Depreciation Equipment 19 000 Equipment 28 000 Cash 3 000 Valuation of equipment Book value of equipment given up 9 000 Fair value of boot given up New equipment 3 000 12 000 OR Fair value received Less Gain deferred 15 500 3 500 New equipment 12 000 Fair value of old equipment 12 500 Less Book value of old equipment Gain on disposal 9 000 3 500 Note Cash paid is less than 25 of the total amount given up the transaction is nonmonetary so the gain is deferred Tony Lo Bianco Company Cash 3 000 Equipment 12 500 Accumulated Depreciation Equipment 10 000 Loss on Disposal of Equipment 2 500 Equipment Computation of loss Book value of old equipment 18 000 Less Fair value of old equipment 15 500 Loss on disposal of equipment 2 500 28 000 EXERCISE 10 19 Continued b Exchange has commercial substance Carlos Arruza Company Equipment 15 500 Accumulated Depreciation Equipment 19 000 Equipment 28 000 Cash 3 000 Gain on Disposal of Equipment 3 500 Cost of new equipment Cash paid 3 000 Fair value of old equipment Cost of new equipment 12 500 15 500 Computation of gain on disposal of equipment Fair value of old equipment Less Book value of old equipment 28 000 19 000 Gain on disposal of equipment 12 500 9 000 3 500 Tony LoBianco Company Cash 3 000 Equipment 12 500 Accumulated Depreciation Equipment Old 10 000 Loss on Disposal of Equipment 2 500 Equipment 28 000 Cost of new equipment Fair value of equipment Less Cash received Cost of new equipment 15 500 3 000 12 500 Computation of loss on disposal of equipment Book value of old equipment 28 000 10 000 Less Fair value of equipment Old Loss on disposal of equipment 18 000 15 500 2 500 EXERCISE 10 21 20 25 minutes a Any addition to plant assets is capitalized because a new asset has been created This addition increases the service potential of the plant b Expenditures that do not increase the service benefits of the asset are expensed Painting costs are considered ordinary repairs because they maintain the existing condition of the asset or restore it to normal operating efficiency c The approach to follow is to remove the old book value of the roof and substitute the cost of the new roof It is assumed that the expenditure increases the future service potential of the asset d Conceptually the book value of the old electrical system should be removed However practically it is often difficult if not impossible to determine this amount In this case one of two approaches is followed One approach is to capitalize the replacement on the theory that sufficient depreciation was taken on the old system to reduce the carrying amount to almost zero A second approach is to debit accumulated depreciation on the theory that the replacement extends the useful life of the asset and thereby recaptures some or all of the past depreciation In our present situation the problem specifically states that the useful life is not extended and therefore debiting Accumulated Depreciation is inappropriate Thus this expenditure should be added to the cost of the plant facility e See discussion in d above In this case because the useful life of the asset has increased a debit to Accumulated Depreciation would appear to be the most appropriate