Stice 18e Ch10 SOL Final PDF

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CHAPTER 10
QUESTIONS
1. a. The cost of land includes the original chased trademarks are recorded at the
purchase price; brokers’ commissions; purchase price.
legal fees; title, recording, and escrow 3. Accountants frequently are required to allo-
fees; surveying costs; local government cate costs among two or more accounts.
special assessment taxes; cost of The principal method of allocation is based
clearing or grading; and other costs on relative fair values of the individual as-
that permanently improve the land or sets, if they can be determined. A ratio of
prepare it for use. Expenditures for land each individual asset’s fair value to the sum
improvements that have a limited life, of the fair values for all assets involved in
such as paving, fencing, and landscap- the purchase is used to determine cost for
ing, may be separately summarized as each individual asset. If fair values, or
land improvements and depreciated some approximation of fair values, cannot
over their estimated useful lives. be obtained for all assets in the basket pur-
b. The cost of buildings includes the origi- chase, allocation can be made to those as-
nal purchase price, brokers’ commis- sets where fair values are available, and
sions, legal fees, title and escrow fees, any remaining balance can be allocated, on
reconditioning costs, alteration and im- some systematic basis, to remaining as-
provement costs, and any other costs sets.
that improve the buildings and hence 4. When equipment is purchased on a de-
benefit future periods. ferred payment contract, care must be
c. The cost of equipment includes the taken to exclude the stated or implicit inter-
original purchase price, taxes and du- est from the purchase price. The asset
ties on purchases, freight charges, in- should be recorded at its equivalent cash
surance while in transit, installation price. Interest on the unpaid contract bal-
charges and other costs in preparing ance should be recognized as interest ex-
the asset for use, subsequent im- pense over the life of the contract.
provements or additions, and any other 5. a. Sales practice for some products con-
expenditures that will improve the sistently inflates the list price that is ini-
equipment and thus benefit more than tially assigned. Because most buyers
one period. are aware of this practice, considerable
2. a. A copyright, when purchased, is re- negotiations take place between buyers
corded at its purchase price. When in- and sellers before a market price is es-
ternally developed, all costs of legally tablished. If accountants use the list
establishing the copyright are included price without careful evaluation, values
as costs of the copyright. could be inflated.
b. The cost of purchasing a franchise and b. The goal of accounting for the acquisi-
all other sums paid specifically for a tion of property and equipment is to re-
franchise including legal fees are con- cord the acquisition at the equivalent
sidered the franchise cost. Property cash price or the closest approximation
improvements required under the fran- to cash that can be obtained. This is
chise also are recorded as part of the especially important when trade-ins are
franchise cost. involved.
c. The cost of a trademark includes all 6. a. In constructing a new building for its
expenditures required to establish the own use, Gaylen Corp. will charge the
trademark, such as filing and registra- building with all costs incurred in con-
tion fees, as well as legal expenses for nection with the construction activities.
the defense of the trademark. Pur- These costs will include building costs
in the form of direct labor, direct mate-
381
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382 Chapter 10
rials, factory overhead, and any other understated. Furthermore, subsequent

expenditures that can be identified with income will be overstated through the
the construction of the asset. failure to recognize depreciation, and
b. When a company constructs its own as- this misstatement will be accompanied
sets, there are two positions that may be by misrepresentations of earnings-to-
taken in assigning general overhead to assets and earnings-to-owners’-equity
the cost of the asset: (1) Overhead may relationships reflected on the financial
be assigned to special construction just statements. Properties unconditionally
as it is assigned to normal activities on transferred should be recognized by
the grounds that both activities benefit debits to asset accounts and a credit to
from the overhead; this would mean that a revenue account in terms of the fair
construction would be charged with the market values of the properties ac-
increase in overhead arising from con- quired, and depreciation should be rec-
struction activities as well as a pro rata ognized in using such properties.
share of the company’s fixed overhead. b. If the donation of the property is contin-
(2) Only the increase in overhead may gent upon certain conditions, the presi-
be charged to construction on the dent’s position relative to the nonrec-
grounds that management decides to ognition of the asset is proper until the
construct its own assets after giving due time the conditions are met. Until the
consideration to the differential or addi- conditions are met, the fair value of the
tional costs involved. An equitable allo- conditional gift, along with a description
cation of the fixed overhead between of the conditions, should be disclosed
regular operations and construction af- in the notes to the financial statements.
fords no special favor to construction ac-
10. Under IAS 41, biological assets, such as
tivities; on the other hand, a charge to
cattle, fruit trees, and lumber forests, are
construction for only the increase in total
recorded in the balance sheet at their fair
overhead grants no special concessions
value (less estimated selling costs) as of
to regular activities during the construc-
the balance sheet date. Increases in this
tion period.
fair value are recognized as gains, and de-
7. Before interest charges are capitalized, a creases are recognized as losses.
construction project should be a discrete
11. An asset retirement obligation is a legal
project. Interest should not be capitalized
obligation a company has to restore the site
for inventories manufactured or produced
of a piece of property or equipment when
on a repetitive basis, for assets that are
the asset is retired. The estimated fair
currently being used, or for assets that are
value of the asset retirement obligation is
idle and not undergoing activities to pre-
recognized as a liability and is added to the
pare them for use.
cost of the asset when it is acquired.
8. Under IAS 23, a company capitalizes the
12. Many companies establish a minimum
net amount of interest which is the gross
monetary amount for recording expendi-
amount of interest, computed as under U.S.
tures as assets, even though the item pur-
GAAP, less the amount of investment in-
chased meets the definition of an asset.
come generated by borrowed construction
The principal reasons for this are material-
funds that are temporarily invested before
ity and the cost involved in recording an
they are needed to pay for construction ex-
asset and depreciating it over its estimated
penditures. Accordingly, the amount of in-
life. It is more expedient to expense these
terest capitalized under the international
smaller capital expenditures immediately,
standard is generally less than the amount
thus avoiding the recordkeeping associated
that would be capitalized under the U.S.
with assets.
standard.
13. a. The cost of a depreciable asset incor-
9. a. If the donation of the property by the
rectly recorded as an expense will un-
philanthropist is unconditional, the
derstate assets and owners’ equity for
president’s position cannot be de-
the current year and for succeeding
fended. If the donation is not recog-
years, but by successively decreasing
nized, both assets and income will be
amounts until the asset no longer
Chapter 10 383
makes a contribution to periodic reve- and owners’ equity for the first year and
nue. Net income will be understated in for succeeding years, but by succes-
the first year by the excess of the ex- sively decreasing amounts until the
penditure over depreciation for the cur- charge has been fully written off. Net
rent period; net income in succeeding income will be overstated for the first
years will be overstated by the amount year by the difference between the rec-
of depreciation charges applicable to ognized depreciation for the current pe-
the asset that should be charged off as riod and the amount of the expenditure;
expense. net income for succeeding years will be
b. An expense expenditure incorrectly understated by the depreciation charges
recorded as an addition to the cost of a recognized in such periods.
depreciable asset will overstate assets
14. Expenditure Classification
a. Cost of installing machinery.......................................... Asset
b. Cost of unsuccessful litigation to protect patent........... Expense
c. Extensive repairs as a result of a fire ........................... Expense
d. Cost of grading land ..................................................... Asset
e. Insurance on machinery in transit ................................ Asset
f. Interest incurred during construction period ................. Asset (if interest added to construction
cost)
Expense (if interest charged to expense)
g. Cost of replacing a major machinery component......... Asset
h. New safety guards on machinery ................................. Asset
i. Commission on purchase of real estate ....................... Asset
j. Special tax assessment for street improvements......... Asset
k. Cost of repainting offices .............................................. Expense
15. The remaining net book value of a compo- talized if they are incurred after techno-
nent that is replaced is added to deprecia- logical feasibility has been established.
tion expense for the period.
17. With the full cost method of accounting for
16. a. Research activities are those used to oil and gas exploration costs, the cost of
discover new knowledge that will be drilling dry holes is capitalized and amor-
useful in developing new products, ser- tized. With the successful efforts method,
vices, or processes, or significantly im- only the exploratory costs associated with
prove an existing product or process. successful wells are capitalized; the cost of
Development activities seek to apply dry holes is expensed as incurred.
research findings to develop a plan or
18. In general, the cost of internally generated
design for new or improved products
intangibles is expensed as incurred.
and processes. Development activities
include the formulation, design, and 19. The five general categories of intangible
testing of products, construction of pro- assets are as follows:
totypes, and operation of pilot plants. 1. Marketing related.
2. Customer related.
b. Research and development costs are
3. Artistic related.
generally expensed in the period in-
4. Contract based.
curred. An exception is when the ex-
5. Technology based.
penditure is for equipment and facilities
that have alternate future uses beyond 20. The two approaches used in estimating fair
the specific current research project. values using present value computations
This exception permits the deferral of are the traditional approach and the ex-
costs incurred for materials, equipment, pected cash flow approach. In the tradi-
facilities, and intangibles purchased, tional approach, which is often used in
but only if the alternative future use can situations in which the amount and timing
be specifically identified. In addition, of the future cash flows is determined by
software development costs are capi- contract, the present value is computed
384 Chapter 10
using a risk-adjusted interest rate that in- 24. Under the provisions of IAS 16, the credit
corporates expectations about the uncer- entry is to a revaluation equity account when
tainty of receipt of the future contractual noncurrent operating assets are written up
cash flows. to reflect an increase in market value. (The
important point is that the revaluation
In the expected cash flow approach, a
amount is not to be reported as a gain in the
range of possible outcomes is identified,
income statement.)
the present value of the cash flows in each
possible outcome is computed (using the 25. Under the provisions of IAS 40, a company
risk-free interest rate), and a weighted- can elect to use a fair value approach in
average present value is computed by which the investment property is reported in
summing the present value of the cash the balance sheet at its fair value, and any
flows in each outcome, multiplied by the es- resulting gains or losses are reported in the
timated probability of that outcome. income statement.
21. a. Goodwill may be reported properly as 26. The fixed asset turnover ratio is computed
an asset only when it is purchased or as sales divided by average property, plant,
otherwise established by a transaction and equipment (fixed assets); it is inter-
between independent parties. preted as the number of dollars in sales
b. Expenditures for advertising should not generated by each dollar of fixed assets.
be capitalized as goodwill. Some ad-
27. As with all ratios, the fixed asset turnover
vertising expenditures may be deferred
ratio must be used carefully to ensure that
if the costs applicable to future benefits
erroneous conclusions are not made. For
from such advertising can be deter-
example, fixed asset turnover ratio values
mined objectively. Normally, however, it
for two companies in different industries
is advisable to expense such expendi-
cannot be meaningfully compared. Another
tures because of the short-lived nature
difficulty in comparing values for the fixed
of the benefits and because future
asset turnover ratio among different compa-
benefits may be difficult to estimate.
nies is that the reported amount for property,
22. The fair value of acquired in-process re- plant, and equipment can be a poor indicator
search and development is recognized as of the actual fair value of the fixed assets
an asset when acquired as part of a busi- being used by a company. Another compli-
ness combination but as an expense when cation with the fixed asset turnover ratio is
acquired as a basket purchase outside a caused by leasing. Many companies lease
business combination. the bulk of their fixed assets in such a way
that the assets are not included in the bal-
23. Recording noncurrent operating assets at
ance sheet. This practice biases the fixed
their current values represents a trade-off
asset turnover ratio for these companies
between relevance and reliability. In the
upward because the sales generated by the
United States, reliability concerns have re-
leased assets are included in the numerator
sulted in the prohibition of asset write-ups. In
of the ratio but the leased assets generating
many countries around the world, account-
the sales are not included in the denomina-
ants have learned to rely on the judgment of
tor.
professional appraisers who estimate the
current value of long-term assets.
Chapter 10 385
PRACTICE EXERCISES
PRACTICE 10–1 CATEGORIES OF TANGIBLE NONCURRENT OPERATING ASSETS
1. Land
Cost to purchase land ..................................................... $ 85,000
Cost to purchase land ..................................................... 50,000
Cost to prepare land for use ........................................... 10,000
Total................................................................................... $145,000
2. Buildings
Cost to construct building .............................................. $132,000
3. Equipment
Cost to purchase equipment........................................... $ 30,000
Cost to ship and install equipment ................................ 1,000
Cost of testing .................................................................. 1,750
Total................................................................................... $ 32,750
4. Land Improvements
Cost to construct parking lot and sidewalks ................ $ 10,000
PRACTICE 10–2 BASKET PURCHASE
Allocated
Cost
Equipment $250,000 (250,000/800,000) × $750,000 $234,375
Building 425,000 (425,000/800,000) × $750,000 398,438
Land 125,000 (125,000/800,000) × $750,000 117,187
Total $800,000 $750,000
(Note: Some rounding is necessary to ensure that the total allocated cost is
$750,000.)
386 Chapter 10
PRACTICE 10–3 DEFERRED PAYMENT
1. Equipment................................................................................ 120,696
Discount on Notes Payable.................................................... 49,304
Cash.................................................................................... 10,000
Notes Payable .................................................................... 160,000
Business calculator keystrokes:
N = 8 years
I = 9%
PMT = $20,000
FV = 0 (There is no balloon payment associated with the note.)
PV = $110,696
2. Notes Payable.......................................................................... 20,000

Cash.................................................................................... 20,000
Interest Expense ..................................................................... 9,963
Discount on Notes Payable .............................................. 9,963
Interest expense: ($160,000 – $49,304) × 0.09 = $9,963
PRACTICE 10–4 EXCHANGE OF NONMONETARY ASSETS
Equipment ........................................................................................ 97,300

Gain on Asset Exchange ........................................................ 62,300
Land.......................................................................................... 35,000
PRACTICE 10–5 COST OF A SELF-CONSTRUCTED ASSET
Cost of materials............................................................................................ $ 400,000

Labor cost ...................................................................................................... 600,000
Allocated overhead cost ($8,000,000/$4,000,000) × $600,000 ................... 1,200,000
Interest cost ................................................................................................... 140,000
Total......................................................................................................... $2,340,000
Chapter 10 387
PRACTICE 10–6 CAPITALIZED INTEREST: SINGLE-YEAR COMPUTATION
Applicable Months of
Interest Avoidable Capitalized
Amount Rate Interest Interest
January 1 $100,000 10% 12/12 $10,000
May 1 200,000 13 8/12 17,333
November 1 300,000 13 2/12 6,500
Total $600,000 $33,833
1. Amount of capitalized interest = $33,833

2. Cost of building = $600,000 + $33,833 = $633,833
PRACTICE 10–7 CAPITALIZED INTEREST: JOURNAL ENTRY
Building ............................................................................................ 33,833

Interest Expense ($270,000 – $33,833) .......................................... 236,167
Cash.......................................................................................... 270,000
Total interest: ($100,000 × 0.10) + ($2,000,000 × 0.13) = $270,000
PRACTICE 10–8 CAPITALIZED INTEREST: MULTIPLE-YEAR COMPUTATION
Applicable Months of
Interest Avoidable Capitalized
Amount Rate Interest Interest
From Year 1 $ 100,000 10% 12/12 $ 10,000
533,833 13 12/12 69,398
July 1 500,000 13 6/12 32,500
Total $1,133,833 $111,898
1. Amount of capitalized interest = $111,898

2. Cost of building = $1,133,833 + $111,898 = $1,245,731
PRACTICE 10–9 ACQUISITION BY DONATION
Land .................................................................................................. 111,000

Revenue (or Gain) ................................................................... 111,000
388 Chapter 10
PRACTICE 10–10 ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION
Mining Site........................................................................................ 800,000

Cash.......................................................................................... 800,000
Mining Site........................................................................................ 72,489
Asset Retirement Obligation.................................................. 72,489
Business Calculator Keystrokes:
FV = $200,000; I = 7%; N = 15 years → $72,489
PRACTICE 10–11 RENEWALS AND REPLACEMENTS
Heating/Cooling System ................................................................. 210,000

Accumulated Depreciation—Buildings (old system)................... 128,000
Depreciation Expense ..................................................................... 32,000
Buildings (old system)............................................................ 160,000
Cash.......................................................................................... 210,000
PRACTICE 10–12 RESEARCH AND DEVELOPMENT
(1) Normal: Expense all—$120,000 + $100,000 = $220,000

(2) Software: Expense amounts before technological feasibility: $120,000
(3) International: Expense amounts before technological feasibility: $120,000
PRACTICE 10–13 OIL AND GAS EXPLORATION COSTS
(1) Successful efforts: Expense all costs of dry holes = $400,000.

(2) Full cost: Capitalize all costs, and amortize the amount to expense in subse-
quent years. Accordingly, expense for this year is $0. (Note: Because all costs
were incurred on the last day of the year, there is no amortization this year.)
PRACTICE 10–14 ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY
Cash price .................................................................................. $1,400,000

Fair value of net assets ($1,360,000 – $500,000) .................... 860,000
Goodwill...................................................................................... $ 540,000
Cash .................................................................................................. 20,000

Accounts Receivable ...................................................................... 190,000
Inventory........................................................................................... 320,000
Patent................................................................................................ 80,000
Property, Plant, and Equipment ..................................................... 750,000
Goodwill............................................................................................ 540,000
Liabilities.................................................................................. 500,000
Cash.......................................................................................... 1,400,000
Chapter 10 389
PRACTICE 10–15 ACCOUNTING FOR A BARGAIN PURCHASE
Cash price .................................................................................. $ 720,000

Market value of net assets ($1,360,000 – $500,000) ............... 860,000
Bargain purchase amount ........................................................ $(140,000)
Cash .................................................................................................. 20,000

Accounts Receivable ...................................................................... 190,000
Inventory........................................................................................... 320,000
Patent................................................................................................ 80,000
Property, Plant, and Equipment ..................................................... 750,000
Gain .......................................................................................... 140,000
Liabilities.................................................................................. 500,000
Cash.......................................................................................... 720,000
PRACTICE 10–16 INTANGIBLES AND A BASKET PURCHASE
Cost Allocation Cost

Estimated According to Assigned to
Fair Values Relative Estimated Values Individual Items
Building ......................... $200,000 200,000/570,000 × $500,000 $175,439
Operating permit........... 100,000 100,000/570,000 × $500,000 87,719
In-process R&D............. 150,000 150,000/570,000 × $500,000 131,579
Order backlog ............... 120,000 120,000/570,000 × $500,000 105,263
$570,000 $500,000
Building ............................................................................................ 175,439

Operating Permit.............................................................................. 87,719
R&D Expense*.................................................................................. 131,579
Order Backlog .................................................................................. 105,263
Cash.......................................................................................... 500,000
*The acquired in-process R&D is recognized as an expense because it has been ac-
quired in a basket purchase outside a business combination.
PRACTICE 10–17 INTANGIBLES AND A BUSINESS ACQUISITION
Cash .................................................................................................. 100,000

Inventory........................................................................................... 50,000
In-Process R&D Asset..................................................................... 500,000
Goodwill............................................................................................ 450,000
Liabilities.................................................................................. 300,000
Cash.......................................................................................... 800,000
390 Chapter 10
PRACTICE 10–18 FIXED ASSET TURNOVER RATIO
Fixed asset turnover ratio = Sales/Average net property, plant, and equipment
= $480,000/[($160,000 + $200,000)/2]
= 2.67
PRACTICE 10–19 DANGER IN USING FIXED ASSET TURNOVER RATIO
Company B
= $360,000/[($200,000 + $220,000)/2]
= 1.71
Company A⎯using historical cost of fixed assets
= $480,000/[($160,000 + $200,000)/2]
= 2.67
Company A⎯using market value of fixed assets
= $480,000/[($290,000 + $310,000)/2]
= 1.60
Company A is more efficient (i.e., has a higher fixed asset turnover ratio) if one uses
historical cost of fixed assets (2.67 compared to 1.71). However, Company B’s fixed
assets are younger and are therefore reported at amounts close to their market
values. If we assume that the reported amounts of Company B’s fixed asset are a fair
approximation of their market values, then it appears that Company B is more effi-
cient than is Company A (1.71 compared to 1.60).
Chapter 10 391
EXERCISES
10–20. During the construction period, the expenditures will be charged as

follows:
Land
Land Improvements Building
Purchase of land ...................................... $282,000
Land survey .............................................. 4,800
Fees for search of title for land............... 500
Building permit ......................................... $ 4,000
Temporary quarters for construction
crews ....................................................... 11,200
Payment to tenants of old building for
vacating premises .................................. 4,450
Razing old building .................................. 41,000
Excavating basement............................... 13,000
Special assessment tax for street
project ..................................................... 2,400
Costs of construction .............................. 2,395,000
Cost of paving parking lot adjoining
building ................................................... $55,000
Cost of shrubs, trees, and other
landscaping ............................................ 36,000
Total ....................................................... $335,150 $91,000 $2,423,200
Dividends, $4,000, should be closed to Retained Earnings. Damages
awarded for injuries sustained in construction, $8,750, are charged to a
loss account.
10–21. Patents....................................................................................... 19,100*

Cash ..................................................................................... 19,100
*$13,400 legal expenses + $2,500 drawings + $3,200 fees = $19,100
Research and Development Expense..................................... 50,800*
Machinery .................................................................................. 33,800†
Cash (or other credits) ....................................................... 84,600
*$34,000 lab expenses + $16,800 wages (40% of $42,000) = $50,800
†
$6,000 metal + $2,600 blueprints + $25,200 wages (60% of $42,000) = $33,800
Patents....................................................................................... 19,300
Cash ..................................................................................... 19,300
To record cost of defending patent.
392 Chapter 10
10–22. Cost
Cost Allocation Assigned to
Appraised According to Individual
Property Value Appraised Values Assets
Land.......................... $ 250,000 (250,000/1,050,000) × $920,000 = $ 219,048
Buildings.................. 600,000 (600,000/1,050,000) × $920,000 = 525,714
Equipment................ 200,000 (200,000/1,050,000) × $920,000 = 175,238
Total....................... $1,050,000 $ 920,000
10–23. Land [($600,000 ÷ 2/3) – $600,000] ............................. 300,000

Building ........................................................................ 600,000
Patent............................................................................ 337,000
Franchise...................................................................... 213,000*
Cash ........................................................................ 1,450,000
To record purchase of assets for $1,450,000,
allocated on the basis of fair market value
of individual assets.
*Franchise: $1,450,000 – $1,237,000 (sum of patent,
building, and land) = $213,000
10–24. 2013
July 1 Equipment ............................................................ 96,000
Discount on Notes Payable ................................ 26,420
Notes Payable ................................................ 112,420
Cash ................................................................ 10,000
2014
June 30 Notes Payable ...................................................... 11,242
Cash ................................................................ 11,242
Interest Expense.................................................. 4,466*
Discount on Notes Payable .......................... 4,466
*5.193% × ($112,420 – $26,420) = $4,466
2015
June 30 Notes Payable ...................................................... 11,242
Cash ................................................................ 11,242
Interest Expense.................................................. 4,114*
Discount on Notes Payable .......................... 4,114
*5.193% × ($101,178 – $21,954) = $4,114
Chapter 10 393
10–25. Value of the equipment considering interest at 9%

PV of $8,600 for 10 years at 9%
PVn = R(PVAF 10 9% )
= $8,600(6.4177)= $55,192 (rounded)
or with a business calculator:
PMT = $8,600; N = 10; I = 9% → PV = $55,192
$86,000 – $55,192 = $30,808
Correcting entry:
Discount on Notes Payable............................................. 30,808
Equipment................................................................... 30,808
10–26. Trademarks....................................................................... 183,000

Land ($732,000 × 0.20) ..................................................... 146,400
Buildings........................................................................... 585,600
Franchise .......................................................................... 145,000*
Common Stock ........................................................... 20,000
Paid-ln Capital in Excess of Par................................ 1,040,000
*Market value of stock .....................................................$1,060,000
Amount assigned on basis of known market
values:
Trademarks ............................. $183,000
Land ......................................... 146,400
Buildings ................................. 585,600 915,000
Value assigned to franchise.. $ 145,000
10–27. Buildings ............................................................................ 680,000

Premium on Bonds Payable ($350,000 × 0.06) .......... 21,000
Bonds Payable ............................................................. 350,000
Common Stock............................................................. 90,000
Paid-ln Capital in Excess of Par ................................. 219,000*
*$680,000 (cost of building) – $371,000 (market value of
bonds) = $309,000 (value assigned to common stock);
$309,000 – $90,000 (par value) = $219,000 paid-in capital
in excess of par.
394 Chapter 10
10–28. Land................................................................................ 885,000*

Common Stock (50,000 × $0.50) .............................. 25,000
Paid-ln Capital in Excess of Par .............................. 725,000
Cash ........................................................................... 135,000
*Market value of stock: 50,000 shares × $15 .......... $ 750,000
Cash paid:
Purchase price (partial) ........... $80,000
Legal cost ................................. 10,000
Property tax—previous year ... 30,000
Building demolition .. $21,000
Less: Salvage ............ 6,000 15,000 135,000
Total .......................................................................... $ 885,000
10–29. Cost to construct special equipment:

Direct material.......................................................... $ 320,000
Direct labor............................................................... 200,000
Variable overhead ($200,000 × 1.40) ...................... 280,000
Fixed overhead ($700,000 × 0.35) ........................... 245,000
Total costs exclusive of interest ...................... $1,045,000
Interest charges capitalized ................................... 25,000*
Total cost of self-constructed equipment ....... $1,070,000
*Interest charge: $1,045,000 × 10% × 3/12 year = $26,125
Limited to amount of interest paid: $500,000 × 10% × 6/12 = $25,000
10–30. (1) Computation of the amount of interest to be capitalized for 2013 is as

follows:
Interest Fraction
Capitalization of the Year Capitalized
Expenditure Date Amount Rate Outstanding Interest
January 2, 2013 ................. $500,000 10.0% 12/12 $50,000
May 1, 2013 ........................ 450,000 10.0 8/12 30,000
November 1, 2013 ............. 550,000 10.0 2/12 9,167
150,000 12.4* 2/12 3,100
Total capitalized interest for 2013 ............................................................. $92,267
*Weighted-average interest rate on general bond liabilities:
Interest
Bond Issue Principal Rate Cost
10-year $ 500,000 13.0% $ 65,000
5-year 800,000 12.0 96,000
$1,300,000 12.4 $ 161,000
Weighted-average rate = $161,000 ÷ $1,300,000 = 12.4% (rounded)
Chapter 10 395
10–30. (Concluded)
(2) Computation of the amount of interest to be capitalized for 2014 is as

follows:
Interest Fraction
Expenditure Date Amount Rate Outstanding Interest
Accumulated in 2013 ........ $ 1,500,000 10.0% 12/12 $ 150,000
242,267 12.4 12/12 30,041
March 1, 2014 .................... 950,000 12.4 10/12 98,167
September 1, 2014 ............ 800,000 12.4 4/12 33,067
November 30, 2014 ........... 600,000 12.4 1/12 6,200
Total capitalized interest for 2014 ....................................................... $ 317,475
Interest capitalized in 2014 is restricted to the total interest incurred of $311,000*
because this amount is less than the indicated amount to be capitalized of
$317,475.
*($1,500,000 x 0.10) + ($500,000 x 0.13) + ($800,000 x 0.12) = $311,000
10–31. (a) NC. The construction does not cover an extended period of time.
(b) C.
(c) NC. The construction costs are not separately accumulated.
(d) NC. The construction costs are not substantial.
(e) NC. The equipment is produced on a repetitive basis.
(f) NC. The building is in use throughout the construction.
(g) NC. The land is idle.
10–32.
Initial Acquisition
Detoxification Facility.................................. 900,000
Cash......................................................... 900,000
Asset Retirement Obligation ................. 335,945
FV = $1,300,000; I = 7%; N = 20 years → $335,945
After 1 Year
Asset Retirement Obligation ................. 27,651
FV = $100,000; I = 7%; N = 19 years → $27,651
396 Chapter 10
10–33. (a) Wall .................................................................................... 84,000

Accumulated Depreciation—Buildings (old wall) ......... 18,000
Depreciation Expense...................................................... 42,000
Buildings (old wall)..................................................... 60,000
Cash............................................................................. 84,000
(b) Filters................................................................................. 20,000
Accumulated Depreciation (old filters) .......................... 2,750
Depreciation Expense...................................................... 8,250
Filters (old filters) ....................................................... 11,000
Cash............................................................................. 20,000
10–34. 1. All $325,000 should be charged to research and development expenses.

Only expenditures for equipment that can be used on other projects can
be deferred. No such alternative uses are identified in the problem.
2. Materials and equipment, exclusive of equipment useful
on other projects ............................................ $ 80,000
Personnel............................................................ 105,000
Indirect costs...................................................... 60,000
Equipment depreciation ($80,000 ÷ 5)* ............ 16,000
Total.................................................................. $261,000
*The equipment’s useful life on other projects would be the basis for
the cost allocation to research and development expense for 2013.
10–35. 1. (a) E
(b) C
(c) E
(d) E
(e) E
(f) E
(g) I
(h) I
2. (a) E
(b) C
(c) E
(d) C
(e) C
(f) C
(g) I
(h) I
Chapter 10 397
10–36. 1. Successful efforts method:

Exploration expense...................................................... $18.4 million
Capitalized exploration cost ......................................... $5.6 million
2. Full cost method:
Exploration expense...................................................... 0
Capitalized exploration cost ......................................... $24 million
10–37. (a) Record painting of partitions as an asset. Original painting is consid-

ered an asset expenditure. Repainting is an expense.
(b) Normally record cost of tearing down the wall as a loss. The old wall will
not benefit future periods. Some accountants justify capitalization be-
cause all incremental costs to construct extension should be consid-
ered cost of extension.
(c) Separate asset accounts should be maintained for the machine and the
motor because they have substantially different useful lives. When the
old motor is replaced, any remaining book value should be added to
depreciation expense for the year. The cost of the new motor is re-
corded in a separate asset account.
(d) Record the cost of grading land as an asset. It is a proper addition to
land.
(e) Record the assessment for street paving as an asset. It is a proper addi-
tion to land.
(f) Record cost of tearing down the previously occupied old building in
preparation for a new one as an expense. Expense relates to the old
building, not to new construction. As in (b), some accountants justify
capitalization because cost of tearing down is necessary for new con-
struction.
10–38. 1. Cash ............................................................................... 12,000

Receivables ................................................................... 96,000
Inventory ........................................................................ 145,000
Land, Buildings, and Equipment ................................. 519,000
Goodwill ......................................................................... 354,000*
Current Liabilities.................................................... 75,000
Long-Term Debt....................................................... 116,000
Cash.......................................................................... 935,000
*Balance of purchase price not allocated to identifiable assets.
398 Chapter 10
2. Cash ................................................................................ 12,000

Receivables .................................................................... 96,000
Inventory ......................................................................... 145,000
Land, Buildings, and Equipment .................................. 519,000
Current Liabilities..................................................... 75,000
Long-Term Debt........................................................ 116,000
Cash........................................................................... 445,000
Gain............................................................................ 136,000
10–39. 1. Accounts Receivable..................................................... 200,000

Inventory ......................................................................... 260,000
Prepaid Insurance.......................................................... 12,000
Buildings and Equipment (net)..................................... 168,000
Goodwill .......................................................................... 140,000
Accounts Payable .................................................... 130,000
Cash........................................................................... 650,000
2. Accounts Receivable..................................................... 200,000
Inventory ......................................................................... 260,000
Prepaid Insurance.......................................................... 12,000
Buildings and Equipment (net)..................................... 168,000
Gain............................................................................ 190,000
Accounts Payable .................................................... 130,000
Cash........................................................................... 320,000
10–40.

Internet domain name .. $150,000 150,000/530,000 × $500,000 $141,509
Order backlog ............... 100,000 100,000/530,000 × $500,000 94,340
In-process R&D............. 200,000 200,000/530,000 × $500,000 188,679
Operating permit........... 80,000 80,000/530,000 × $500,000 75,472
$530,000 $500,000
Internet Domain Name ................................................... 141,509

Order Backlog ................................................................. 94,340
R&D Expense*................................................................. 188,679
Operating Permit............................................................. 75,472
Cash ........................................................................... 500,000
Advertising Expense ...................................................... 300,000
Cash ........................................................................... 300,000
Chapter 10 399
10–41.
1. Accounts Receivable.......................................... 180,000

Inventory .............................................................. 75,000
Equipment............................................................ 84,000
Goodwill ............................................................... 626,000
Short-Term Loan Payable............................. 160,000
Cash................................................................ 805,000
The “government contacts” intangible is not separately recognized
because it is not contract based nor is it separately tradable. The
$92,000 fair value estimated for this intangible is imbedded in the
reported amount of goodwill.
2. Accounts Receivable.......................................... 180,000

Inventory .............................................................. 75,000
Equipment............................................................ 84,000
Gain................................................................. 154,700
Short-Term Loan Payable............................. 160,000
Cash................................................................ 24,300
10–42.
2013 2012
Land .................................................... $150,000 $125,000
Buildings ............................................ 500,000 450,000
Equipment .......................................... 260,000 250,000
Total fixed assets............................... $910,000 $825,000
Fixed asset turnover ratio = Sales/Average fixed assets
$3,500,000/[($825,000 + $910,000)/2] = 4.03
400 Chapter 10
PROBLEMS
10–43.
1. Cost of machinery:
Raw materials ................................................................ $ 78,900*
Labor............................................................................... 55,000
Installation ..................................................................... 13,600
Factory overhead .......................................................... 22,700
Materials spoiled in trial runs ...................................... 3,100
Machinery balance ........................................................ $173,300
*Raw materials: $83,400 – $4,500 discount = $78,900
Machine tools balance ...................................................... $ 15,200
2. Correcting Entries
(a) Loss on Sale of Machinery ......................................................... 4,860*
Machinery (Job Order No. 1329) ............................................ 4,860
*Loss: $18,760 cost of dismantling old machine – $13,900 proceeds = $4,860
(b) Purchase Discounts .................................................................... 4,500
To report cash discounts as a reduction in
machine cost.
(c) Machinery (Job Order No. 1329) ................................................ 22,700
Factory Overhead.................................................................... 22,700
To report excess overhead as cost of machine.
(d) Profit on Construction of Machinery ......................................... 22,500
To cancel profit on self-construction; savings
were improperly recognized as profit.
(e) Machine Tools ............................................................................. 15,200
To report machine tools separately.
10–44.
The solution to this problem is adapted from “Qs & As: Technical Hotline,” Journal of
Accountancy, February 1989, p. 31.
(a) and (b) CN—Capitalize and don’t depreciate.
Costs of changing the land itself should be viewed as permanent im-
provements to the land and are not depreciable. These costs include
clearing away unwanted trees and shrubs, shaping the land for the tees
and greens, building sand traps, and constructing artificial lakes.
Chapter 10 401
(c) and (d) CD—Capitalize and depreciate.

If the lives of the plants can be reasonably estimated, the cost of the
plants should be depreciated over those lives. However, if no reason-
able estimates exist, the cost should be capitalized but not depreciated.
(e) and (f) CD—Capitalize and depreciate.
Land improvements that wear out over time should be capitalized and
depreciated.
(g) E—Expense.
The $50 cost of rakes is immaterial in relation to the other golf course
expenditures. The costs of estimating the life of the rakes and maintain-
ing a rake account in the financial records would far exceed the value of
the theoretical improvement in the records. The best approach is to ex-
pense the cost of the rakes.
(h) and (i) CN—Capitalize and don’t depreciate.
All costs of getting the land ready for its intended use should be in-
cluded as part of the land cost.
10–45.
1. Cost of land:
Purchase price ......................................................................................... $ 140,000
Delinquent property taxes ..................................................................... 22,000
Title search and insurance ..................................................................... 7,000
City improvements ................................................................................. 19,500
Cost of destroying buildings, net of salvage used in new building ... 19,000
Total cost of land................................................................................... $ 207,500
Cost of land improvements:
Landscaping ............................................................................................. $ 81,600
Sidewalks and parking lot ....................................................................... 41,000
Total cost of land improvements ......................................................... $ 122,600
2. Cost of building:
Building permit......................................................................................... $ 6,000
Salvage material from old building ........................................................ 5,000
Contract cost ............................................................................................ 1,800,000
Total cost of buildings .......................................................................... $1,811,000
Fire insurance premium on building is charged to expense.
402 Chapter 10
10–46.
2013:
Mar. 1 Land ($800,000 × 0.25) ..................................................... 200,000
Buildings ($800,000 × 0.75) ............................................. 600,000
Property Tax Expense* .................................................... 29,700
Cash .............................................................................. 369,700
Mortgage Payable ........................................................ 460,000
*Alternatively, this could be debited to Prepaid
Property Taxes and adjusted at June 30.
30 Buildings........................................................................... 34,200
Cash .............................................................................. 34,200
(Note: Repairs are capitalized because they were
necessary at acquisition.)
May 15 Cash .................................................................................. 6,600
Buildings....................................................................... 6,600
15 Buildings........................................................................... 101,300
Cash .............................................................................. 101,300
15 Loss on Building Modification to Comply with Safety
Code Requirements ...................................................... 12,400
Cash .............................................................................. 12,400
June 1 Patent ................................................................................ 33,000
Machinery ......................................................................... 31,000
Common Stock............................................................. 4,000
Paid-ln Capital in Excess of Par ................................. 60,000
July 1 Franchise .......................................................................... 50,000
Machinery ......................................................................... 61,000
Discount on Bonds Payable ........................................... 4,000
Cash .............................................................................. 15,000
Bonds Payable ............................................................. 100,000
Nov. 20 Land Improvements ......................................................... 50,900
Cash .............................................................................. 50,900
Dec. 31 Redecorating and Repairs Expense............................... 6,400
Cash .............................................................................. 6,400
Chapter 10 403
10–47.
Organization Expenses ........................................................................ 211,000*

Land, Buildings, and Equipment.................................................. 211,000
To record costs identified with the establishment
of company. These organization costs should be
expensed as incurred.
*Organization fees paid to state....... $ 21,000
Corporate organization costs ......... 40,000
Stock promotion bonus ................... 150,000
$211,000
Land ....................................................................................................... 355,300
Land, Buildings, and Equipment.................................................. 355,300*
*Land site and old building............... $325,000
Title clearance fees .......................... 15,300
Cost of razing old building .............. 15,000
$355,300
Miscellaneous Revenue ....................................................................... 7,000
Land ................................................................................................ 7,000
To reduce the cost of the land by proceeds
from the sale of scrap.
Executive Salaries Expense ................................................................ 100,000
To record executive salaries in expense account.
Patent..................................................................................................... 54,000
To reclassify patent cost to separate account.
Property Tax Expense ........................................................................ 13,200
To reclassify county real estate tax.
Buildings ............................................................................................... 1,450,000
Land, Buildings, and Equipment.................................................. 1,450,000
To reclassify building cost to separate account.
404 Chapter 10
10–48.
(a) Retained Earnings ........................................................................ 120,000

Patents....................................................................................... 120,000
To correct error debiting research and develop-
ment costs of patents to patents in prior period.
(b) Patents ........................................................................................... 14,280
Retained Earnings .................................................................... 14,280
To correct error debiting legal fees in
connection with the issuance of patents to
expenses in prior period.
(c) Patents ........................................................................................... 15,000
Deferred Costs .......................................................................... 15,000
To debit patents with the legal costs in
connection with the successful settlement of
an infringement suit.
(d) Patents ........................................................................................... 24,260
Liability for Settlement of Patent Infringement Suit.............. 23,000
Accrued Attorneys’ Fees ......................................................... 1,260
To record the settlement costs and the
additional legal fees in connection with the
successful settlement of an infringement suit.
Chapter 10 405
10–49.
1.
2013
Jan. 2 Organization Expenses .................................................. 23,300
Cash ........................................................................... 23,300
To record organization cost of legal fees and
stock certificate costs.
(Note: As mentioned in the text, the AICPA has determined that organiza-
tion costs should be expensed as incurred.)
15 Advertising Expense ...................................................... 1,500
Cash ........................................................................... 1,500
To record costs to hire clown and for
pamphlets and candy for promotional purposes.
Apr. 1 Patents............................................................................. 49,250
Cash ........................................................................... 49,250
To record application and legal fees for patents.
May 1 Licenses .......................................................................... 20,000*
Trademarks ($30,000 – $20,000).................................... 10,000
Common Stock.......................................................... 30,000
To record container license and trademark.
*600 × $50 = $30,000 cost of both intangibles
Relative value, license to total cost: 2/3 × $30,000 = $20,000
July 1 Buildings ......................................................................... 131,000
Cash ........................................................................... 131,000
To record cost of building to be used in future
R&D projects.
Dec. 31 Research and Development Expense........................... 175,000
Cash ........................................................................... 175,000
To record salaries of personnel involved in
R&D activities.
2. Intangible assets:
Patents .................................................................................. $49,250
Licenses ................................................................................ 20,000
Trademarks ........................................................................... 10,000 $79,250
406 Chapter 10
10–50.
Land Building Total

Cost..................................................... $ 132,000 (20%) $528,000 (80%) $ 660,000
Escrow fee.......................................... 2,400 9,600 12,000
Property taxes.................................... 2,000 8,000 10,000
Real estate commission.................... 8,000 32,000 40,000
Remodeling and repairs.................... — 58,200 58,200
$ 144,400 $635,800 $ 780,200
(1)
2013
July 1 Land Improvements........................................................ 31,000
Land ................................................................................. 144,400
Building ........................................................................... 635,800
Discount on Notes Payable ........................................... 255,902*
Cash ($811,200 – $344,098)......................................... 467,102
Notes Payable .............................................................. 600,000
*Discount on notes payable:
PVn = R(PVAF n i )
PV = $30,000(Table IV 20 6% )
= $30,000(11.4699)
= $344,097
PMT = $30,000; N = 20; I = 6% → PV = $344,098
Face value .......................................... $600,000
Less: Present value ........................... 344,098
Discount on note ............................... $255,902
(2)
2013
Dec. 31 Notes Payable ................................................................. 30,000
Cash .............................................................................. 30,000
Interest Expense ............................................................. 20,646*
Discount on Notes Payable ........................................ 20,646
*Interest Expense: $344,098 × 0.06 = $20,646
Principal reduction: $30,000 – $20,646 = $9,354
2014
June 30 Notes Payable ................................................................. 30,000
Cash .............................................................................. 30,000
Interest Expense ............................................................. 20,085*
Discount on Notes Payable ........................................ 20,085
*$344,098 – $9,354 = $334,744; $334,744 × 0.06 = $20,085
Chapter 10 407
10–51.
Powersoft Company
Income Statement
For the Year Ended December 31, 2013
Sales .............................................................................................. $675,000
Cost of goods sold:
Beginning inventory ............................................................... $ 155,000
Software production costs..................................................... 49,800
Amortization of capitalized software costs.......................... 32,150
Goods available for sale......................................................... $ 236,950
Ending inventory..................................................................... 94,780 142,170*
Gross profit ................................................................................... $532,830
Expenses:
Salaries and wages of programmers .................................... $ 265,000
Expenses related to research period†................................... 82,200
Total expenses ........................................................................ 347,200
Income before income taxes ....................................................... $185,630
Income taxes (30%) ...................................................................... 55,689
Net income............................................................................... $129,941
*0.60 × $236,950 = $142,170
†
$53,800 expenses incurred after technological feasibility has been established
but before software is available for production would be capitalized and its amor-
tization included in the $32,150 added to cost of goods sold.
10–52.
1. Salvino Company
Analysis of Land Account
For 2013
Balance at January 1, 2013....................................................... $ 150,000
Land site 653:
Acquisition cost ................................................................... $1,600,000
Commission to real estate agent........................................ 90,000
Clearing costs .................................................... $25,000
Less: Amounts recovered................................. 20,000 5,000
Total land site 653 .......................................................... 1,695,000
Land site 654:
Land and building acquisition cost.................................... $ 700,000
Demolition cost .................................................................... 30,000
Total land site 654 .......................................................... 730,000
Balance at December 31, 2013 ................................................. $2,575,000
408 Chapter 10
Salvino Company
Analysis of Buildings Account
For 2013
Balance at January 1, 2013.................................................... $ 910,000
Cost of new building constructed on land site 654:
Construction costs ........................................................... $600,000
Excavation fees................................................................. 35,000
Architectural design fees ................................................. 19,000
Building permit fee ........................................................... 15,000 669,000
Balance at December 31, 2013 .............................................. $1,579,000
Salvino Company
Analysis of Leasehold Improvements Account
For 2013
Balance at January 1, 2013............................................................................ $500,000
Electrical work ................................................................................................ 60,000
Construction of extension to current work area ($80,000 × 1/2)................ 40,000
Office space .................................................................................................... 70,000
Balance at December 31, 2013 ...................................................................... $670,000
Salvino Company
Analysis of Machinery and Equipment Account
For 2013
Balance at January 1, 2013........................................................... $600,000
Cost of new machines acquired:
Invoice price ............................................................................. $90,000
Freight costs............................................................................. 2,000
Unloading charges................................................................... 2,500 94,500
Balance at December 31, 2013 ..................................................... $694,500
2. Items that were not used to determine the answer to (1) and where, or if, these
items should be included in Salvino’s financial statements are as follows:
a. Imputed interest of $60,000 on funds used during construction should not be
included anywhere in Salvino’s financial statements. Only actual interest
incurred can be capitalized.
b. Land site 655, which was acquired for $600,000, should be included in Salvi-
no’s balance sheet as land held for resale.
c. Painting of ceilings for $10,000 should be included as a normal operating ex-
pense in Salvino’s income statement.
d. Royalty payments of $13,000 should be included as a normal operating
expense in Salvino’s income statement.
Chapter 10 409
10–53.
Davis Company
Analysis of Changes in Noncurrent Operating Assets
For the Year Ended December 31, 2013
Balance Balance
Dec. 31, 2012 Increase Decrease Dec. 31, 2013
Land ......................................... $ 280,000 $ 237,250* — $ 517,250
Land improvements................ — 141,000 — 141,000
Buildings ................................. 1,150,000 492,750* — 1,642,750
Machinery and equipment ..... 924,000 223,000† $22,000 1,125,000
Automobiles ............................ 113,000 26,400 — 139,400
Leasehold improvements ...... 277,000 — — 277,000
$2,744,000 $1,120,400 $22,000 $ 3,842,400
COMPUTATIONS:
*Plant facility acquired from Matthews January 6, 2013—allocation to land and
building fair value—10,000 shares of Davis common stock at $73
per share market price ......................................................................... $730,000
Allocation in proportion to appraised values at the exchange date:
Amount % of Total
Land.................................... $195,000 32.5%
Building.............................. 405,000 67.5
$600,000 100.0%
Land ($730,000 × 0.325) ...................................................... $237,250
Building ($730,000 × 0.675) ................................................ 492,750
$730,000
†
Machinery and equipment purchased July 1, 2013:
Invoice cost.................................................................... $187,000
Delivery cost .................................................................. 14,000
Installation cost ............................................................. 22,000
Total acquisition cost ............................................... $223,000
(Note: The land purchased November 4 would be reported as an investment, not
as a noncurrent operating asset.)
410 Chapter 10
10–54.
1. 2013 interest accrued:

12%, 5-year note ($2,000,000 × 0.12) ................................................... $ 240,000
10%, 10-year bonds ($8,000,000 × 0.10) .............................................. 800,000
13%, 3-year loan ($2,000,000 × 0.13) ................................................... 260,000
Total interest accrued—2013* ........................................................ $1,300,000
*Maximum that can be capitalized.
2. Weighted-average interest rate, general liabilities:

Loan Amount Rate Interest Expense
$ 2,000,000 × 12% = $ 240,000
8,000,000 × 10 = 800,000
$10,000,000 $1,040,000
Weighted-average interest rate
($1,040,000 ÷ $10,000,000) = 10.4%
3. Ship 340: Completed in October 2012. No capitalized interest in 2013.

Interest Fraction
Expenditures Amount Rate Outstanding Interest
Ship 341:
Accum. expenditure............ $1,150,000 10.4% 6/12 $ 59,800
April 1, 2013 ......................... 1,200,000 10.4 3/12 31,200
Ship 342:
Accum. expenditure............ 1,200,000 10.4 9/12 93,600
May 1, 2013 .......................... 1,600,000 10.4 5/12 69,333
Ship 343:
Accum. expenditure............ 750,000 13.0 12/12 97,500
July 1, 2013 .......................... 1,250,000 13.0 6/12 81,250
950,000 10.4 6/12 49,400
Ship 344:
Sept. 1, 2013 ........................ 810,000 10.4 4/12 28,080
Ship 345:
Nov. 1, 2013 ......................... 360,000 10.4 2/12 6,240
Total capitalized interest for 2013 ........................................................... $516,403
Chapter 10 411
10–55.
1. Self-Constructed Equipment Cost

Stated at Full Cost
Services of consulting engineer ................................................................... $ 10,000
Work subcontracted ....................................................................................... 20,000
Materials .......................................................................................................... 200,000
Production labor ............................................................................................. 65,000
Maintenance labor used on self-construction ............................................. 100,000
Payroll taxes and employee fringe benefits for indirect labor (30%) ........ 30,000
Manufacturing overhead................................................................................ 52,000*
Allocated executive salaries.......................................................................... 22,500
Postage, telephone, supplies, and miscellaneous expenses .................... 10,500
Total............................................................................................................ $510,000
*Manufacturing overhead cost:

Total manufacturing overhead ....................................................... $5,630,000
Less: Maintenance labor used on
self-construction............................................. $100,000
Payroll taxes and employee fringe benefits
for maintenance labor (30%) to be charged
directly to equipment...................................... 30,000 130,000
Balance to be allocated................................................................... $5,500,000
Production labor for normal products........................................... $6,810,000
Add: Production labor used on self-construction........................ 65,000
Total production labor..................................................................... $6,875,000
Manufacturing overhead = 80% ($5,500,000 ÷ $6,875,000) of
production labor = 0.80 × $65,000 = $52,000.
2. Self-Constructed Equipment Cost

Stated at Incremental Cost
Services of consulting engineer .................................................................. $ 10,000
Work subcontracted ...................................................................................... 20,000
Materials ......................................................................................................... 200,000
Production labor ............................................................................................ 65,000
Variable manufacturing overhead (50% of $52,000) .................................. 26,000
Postage, telephone, supplies, and miscellaneous expenses ................... 10,500
Total........................................................................................................... $331,500
412 Chapter 10
3. The greatest amount that should be capitalized as the cost of equipment is

$400,000—the low bid from a reputable manufacturer. This includes at least a
part of the overhead incurred other than the strictly variable overhead. Most ac-
counting authorities recommend that for self-constructed assets, overhead
should be allocated on the same basis as other production when a plant is not
operating at capacity. This has the effect, however, of increasing net income be-
cause of the reduced overhead allocation to normal production. Any cost in-
curred from the self-construction of an asset computed on a full cost basis that
is in excess of the cost of a comparable asset from a reputable supplier might be
considered a loss and thus charged against revenues of the current period.
10–56.

Approach 1: FV = $10,000; I = 6%; N = 20 years → $3,118
Approach 2: FV = $250,000; I = 6%; N = 20 years → $77,951
Approach 3: FV = $1,200,000; I = 6%; N = 20 years → $374,166
Present Probability-Weighted
Value Probability Present Value
Approach 1 $ 3,118 0.15 $ 468
Approach 2 77,951 0.25 19,488
Approach 3 374,166 0.60 224,500
Total estimated fair value $244,456
Nuclear Waste Repository Site ................................................ 700,000

Cash ...................................................................................... 700,000
Nuclear Waste Repository Site ................................................ 244,456
Asset Retirement Obligation............................................... 244,456
Chapter 10 413
10–57.
1. Current Assets.................................................................... 340,000

Land, Buildings, and Equipment (net).............................. 260,000
Goodwill............................................................................... 1,085,000
Current Liabilities ......................................................... 25,000
Long-Term Liabilities.................................................... 160,000
Cash ............................................................................... 1,500,000
2. The possible reasons Aurora was willing to pay an extra $1,085,000 for Payette
include
• Payette has a strong organization with trained staff already in place.
• Payette has an efficient production and distribution network that is up and
running.
• Payette has good relationships with its banks and suppliers.
• Payette sells a superior product that has a well-established market niche.
3. Current Assets.................................................................... 340,000

Gain.................................................................................. 65,000
Current Liabilities........................................................... 25,000
Long-Term Liabilities ..................................................... 160,000
Cash................................................................................. 350,000
4. Current Assets.................................................................... 340,000

Gain.................................................................................. 265,000
Current Liabilities........................................................... 25,000
Long-Term Liabilities ..................................................... 160,000
Cash................................................................................. 150,000
10–58.
1. 2013:
Interest Expense................................................................. 470,000
Construction in Progress .................................................. 350,000
Accrued Interest Payable................................................... 8,000
Cash ............................................................................... 828,000
2012:
Interest Expense................................................................. 410,000
Construction in Progress .................................................. 260,000
Accrued Interest Payable ............................................. 13,000
Cash ............................................................................... 657,000
414 Chapter 10
2. 2013 Statement of Cash Flows:

In the Cash Flows from Operating Activities section:
Decrease in accrued interest payable ............................................... $ (8,000)
In the Cash Flows from Investing Activities section:
Increase in construction in progress................................................. (350,000)
Supplemental Disclosure:
Cash paid during the year for interest (amount of interest paid
net of the amount capitalized) ............................................................ 478,000
2012 Statement of Cash Flows:
In the Cash Flows from Operating Activities section:
Increase in accrued interest payable................................................. $ 13,000
In the Cash Flows from Investing Activities section:
Increase in construction in progress................................................. (260,000)
Supplemental Disclosure:
Cash paid during the year for interest (amount of interest paid
net of the amount capitalized) ............................................................ 397,000
10–59.
1. Return on equity = Net income ÷ Stockholders’ equity

= $38 million ÷ ($325 million – $180 million)
= 26.2%
Yes, Cole exceeded its profitability goal of 25% ROE.
2. The following adjustments are necessary.

(a) Decrease net income and total assets by $15 million capitalized R&D.
(b) Decrease paid-in capital and total assets by $12 million to reflect market value
of the stock.
(c) The equipment should be recorded at the present value of the payment
stream.
Present value = $1,000,000 + [$3,000,000 × (PVAF, n = 8, i = 12%)]
= $1,000,000 + [$3,000,000 × (4.9676)]
= $15,902,800
PMT = $3,000,000; N = 8; I = 12% → PV = $14,902,919
$1,000,000 + $14,902,919 = $15,902,919
$25,000,000 – $15,902,800 = $9,097,200
Decrease total liabilities and total assets by $9,097,200.
Chapter 10 415
(d) Decrease net income and total assets by $7 million.

After the adjustments, net income is $16 million ($38 million – $15 million – $7
million); total assets are $281.9028 million ($325 million – $15 million – $12
million – $9.0972 million – $7 million); total liabilities are $170.9028 million
($180 million – $9.0972 million); total equity is $111 million ($145 million – $15
million – $12 million – $7 million).
Return on equity = $16 million ÷ $111 million
= 14.4%
After the adjustments, Cole does not meet its profitability goal. Note that item
(c) does not affect the value of ROE and that item (b) actually has the effect of
increasing ROE (by decreasing equity).
3. The auditors should catch this kind of accounting abuse. However, even a good
audit may fail to detect such abuses when employees collude in order to bias the
accounting numbers in some way.
10–60.
(a) Buildings................................................................................... 462,000

Cash ...................................................................................... 462,000
To record cost of addition to building.
(Expenditures for additions are capitalized and are depreciated over the life of
the asset.)
(b) Loss on Removal of Wall (or Operating Expense) ............... 26,020

Cash ...................................................................................... 26,020
To record cost of removal of plant
wall—$23,410 + $2,610.
(Cost to tear down old wall not considered part of new wall cost. No benefit to
future periods from old wall.)
(c) Accumulated Depreciation—Buildings ................................. 17,300

Cash .......................................................................................... 6,570
Depreciation Expense ............................................................. 10,030
Buildings .............................................................................. 33,900
To cancel book value identified with plant wall
and to record amount received from salvage.
(The removed wall will not benefit future operations and therefore should be
eliminated from the books.)
416 Chapter 10
(d) Accumulated Depreciation—Buildings ...................................... 6,250

Depreciation Expense .................................................................. 6,750
Buildings ................................................................................... 13,000
To remove cost of old floor covering.
Floor Covering .............................................................................. 9,190
Cash ........................................................................................... 9,190
To record cost to replace flooring.
(e) Painting Expense .......................................................................... 12,420
Cash ........................................................................................... 12,420
To record maintenance charge for repainting.
(f) Accumulated Depreciation—Buildings ...................................... 990

Buildings ................................................................................... 2,200
To remove cost of old shelving.
Shelving ......................................................................................... 4,180
Cash ........................................................................................... 4,180
To record cost of new shelving.
(g) Buildings........................................................................................ 13,440

Cash ........................................................................................... 13,440
To record cost of new wiring.
(Wiring has same remaining useful life as the building.)
Accumulated Depreciation—Buildings ...................................... 1,900
Buildings ................................................................................... 5,110
To record the removal of old wiring.
(h) Buildings........................................................................................ 9,440

Discount on Notes Payable.......................................................... 800
Notes Payable ........................................................................... 10,240
To record cost of new fixtures.
(Electrical fixtures have the same remaining useful life as the
building.)
Accumulated Depreciation—Buildings ...................................... 1,410
Buildings ................................................................................... 3,300
To record the removal of old fixtures.
Chapter 10 417
10–61.

Customer List
Outcome 1: PMT = $40,000; I = 7%; N = 5 years → $164,008
Outcome 2: PMT = 18,000; I = 7%; N = 4 years → 60,970
Outcome 1 $164,008 0.20 $32,802
Outcome 2 60,970 0.30 18,291
Outcome 3 23,619 0.50 11,810

Ongoing Research Project
Outcome 1: PMT = $450,000; I = 7%; N = 10 years → $3,160,612
Outcome 3: PMT = 500; I = 7%; N = 3 years → 1,312
Outcome 1 $3,160,612 0.10 $316,061
Outcome 2 40,647 0.20 8,129
Outcome 3 1,312 0.70 918

Customer list............. $ 62,903 $62,903/$388,011 × $300,000 $ 48,635
Ongoing research ..... 325,108 $325,108/$388,011 × $300,000 251,365
$388,011 $300,000
Customer List........................................................................................ 48,635

R&D Expense*....................................................................................... 251,365
Cash ................................................................................................. 300,000
418 Chapter 10
10–62.
1.
2013 2012
Land $ 600,000 $ 400,000
Buildings 900,000 800,000
Equipment 350,000 250,000
Total fixed assets $1,850,000 $1,450,000
Fixed asset turnover: $4,800,000/[($1,850,000 + $1,450,000)/2] = 2.91
2. (Note: The LIFO reserves are fair value adjustments that relate to current assets
instead of long-term assets. Also, it is reasonable to assume that the fair values
of cash and accounts receivable are close to their book values.)
Fair value of fixed assets: Fair value of total assets – Cash – Accounts
receivable – Inventory – LIFO reserve
2013: $3,800,000 – $50,000 – $300,000 – $650,000 – $150,000 = $2,650,000
2012: $3,000,000 – $45,000 – $220,000 – $510,000 – $100,000 = $2,125,000
Fixed asset turnover: $4,800,000/[($2,650,000 + $2,125,000)/2] = 2.01
3. It is difficult to tell whether Progressive is more or less efficient at using its fixed
assets than is Steady State. Based on the reported financial numbers, Progres-
sive’s fixed asset turnover is 2.91, whereas the ratio for Steady State is only 2.5.
However, as shown in (2), this difference may result from a difference between
book value and fair value of reported long-term assets. If Steady State has rela-
tively new fixed assets, for which the book value is quite close to the fair value,
then Progressive’s 2.01 fixed asset turnover ratio (based on fair values) is worse
than the 2.5 ratio value for Steady State.
10–63.
1. The correct answer is b. Capitalized interest will be based on the amount of

avoidable interest caused by the building construction. When that amount ex-
ceeds the specific funds borrowed, interest on unrelated liabilities will be ca-
pitalized. When that amount is lower than the funds borrowed, as is the case
here, the amount to be capitalized will be the lower amount of $40,000.
2. The correct answer is b. The only time costs are capitalized as goodwill is when a
business combination occurs and the cost of the acquisition exceeds the fair
market value of the underlying net identifiable assets acquired. Neither the cost
of developing nor of maintaining goodwill is capitalized.
Chapter 10 419
CASES
Discussion Case 10–64
Each of the five items introduced in the case is discussed.

(a) Recorded book values on the books of the seller are irrelevant to the buyer. Fair values of all identi-
fiable assets, both tangible and intangible, should be used to make the entry to record the purchase.
Appraisal values are one source of estimated fair values. Other possible sources include recent
sales of similar assets and engineers’ estimates of building costs. In this instance, the appraisal for
fire insurance purposes is recent enough that it probably could be used for purposes of recording the
purchase. The land value would be $35,000, or 1/5 of the building value. One could object to the
values in the appraisal for fire insurance coverage because of its potential bias toward higher values
to sell more insurance coverage. Evaluation of the reputation of the fire insurance company and its
appraisers would be required to determine the extent of such bias.
(b) Replacement costs of equipment can be used as a basis for determining the fair value of such as-
sets. Because it is easier to obtain replacement costs on new equipment than it is to determine the
market value for used equipment that exactly matches the age and condition of the assets owned, it
is common practice to use the new market price and then depreciate it to the estimated age of the
used equipment. In this instance, the new cost is estimated to be $450,000, and the depreciated
value of 50% of the cost new, $225,000, would be a reasonable estimate of the market price of the
old equipment.
(c) Franchises can be very valuable assets. As with tangible assets, the value recorded on the seller’s
books is irrelevant to the buyer. Because the franchise is for an unlimited time, its value to the buyer
is unaffected by the time the seller used it. The current purchase price of similar franchises,
$120,000, can be used to record the purchase.
(d) The two research scientists who will transfer employment to Fugate represent a value to Fugate.
However, this human resource value is generally not recognized as an asset in our historical cost
system. Fugate would not “own” the scientists, and they could leave the company with no contract
penalties. Only in a few types of activities, such as professional sports, are contracts for human
resources capitalized and carried on the books as assets. In a business acquisition, the intangible
value of “at-will” employees is not recognized but is included as part of goodwill. In this case, the re-
searchers’ salaries will be charged to expense as they are paid. The accounting for human re-
sources is one accounting area that is certain to develop in the future.
(e) Patents are valuable assets that can be owned and transferred. The fair value of the patent is the
appropriate measure of the asset value at the transaction date and the zero book balance on
Gleave’s books is not relevant to Fugate.
The total fair value of the assets acquired would be as follows:
Land ............................................................. $ 35,000
Building ........................................................ 175,000
Equipment .................................................... 225,000
Franchise ..................................................... 120,000
Patents ......................................................... 150,000
Total .......................................................... $705,000
420 Chapter 10
Discussion Case 10–64 (Concluded)
Because only $556,950 was paid for these assets, this was a bargain purchase. The journal entry would
be as follows:
Land ............................................................. 35,000
Building ........................................................ 175,000
Equipment .................................................... 225,000
Franchise ..................................................... 120,000
Patents ......................................................... 150,000
Gain ....................................................... 148,050
Cash ...................................................... 556,950
This case addresses the problems associated with accounting for software development costs. Strategy
wants its financial statements to present a favorable picture of the company’s financial condition and op-
erating performance. If the owner is correct in predicting that this year’s research and development costs
will be recovered through sales in the following year, a strong argument could be made to defer the costs
incurred this year and match them against next year’s revenues. The central issue, however, is whether
the sales will actually materialize next year. The uncertainty of predicting future sales led the FASB to
conclude that until technological feasibility has been established, costs to develop software should be
expensed. It is unclear from this case how much of the $45,000 was related to products for which techno-
logical feasibility had been established and how much related to new products still in the preliminary de-
sign and testing stages. To the extent that the costs were incurred for new products for which technologi-
cal feasibility had not been established, the CPA is correct in insisting that these costs be expensed as
required by the FASB.
From the brief description of Arnold, it is reasonable to assume that Arnold spends a lot for research and
development (R&D) and for advertising. On theoretical grounds, both of these can be argued to be capital
expenditures. However, R&D must be expensed as incurred and advertising expenditures are usually
treated in the same way. This can result in a substantial amount of real economic assets that are not re-
corded on the balance sheet. For example, assume that Arnold spends an average of $300,000 per year
on R&D and $400,000 per year on advertising and that the average economic life of the assets created is
five years for the R&D expenditures and three years for the advertising. This means that Arnold has unre-
corded assets of $2,700,000. If these assets were reported on the balance sheet, Arnold’s ROA would be
about the same as that for Baker.
Other assets that are not shown on companies’ balance sheets include the value of asset appreciation,
key employees, favorable market position, and good reputation with suppliers, creditors, and employees.
The lack of comparability is an issue because some companies have large amounts of unrecorded assets
and others do not. For example, two companies may both have pieces of land with a current market value
of $500,000. However, one company may show the land at $100,000 because it was purchased years
ago while the other may have purchased it just recently and thus will show it at $500,000.
A comparison of the book values of companies (total assets – total liabilities) and the market values of
those companies as measured by total market value of shares outstanding illustrates that there is consid-
erable variability among companies, a fact that suggests companies often have large amounts of unre-
corded assets.
Chapter 10 421
The rule requiring firms to expense R&D outlays results in a decrease in net income for most firms. A
decrease in reported net income can impact a firm in several ways:
• Managers’ bonuses are frequently based on reported earnings.
• Loan covenants are often written in terms of reported earnings.
• Some investors seem to rely on the naive use of reported earnings in picking stocks.
Accordingly, managers’ compensation may suffer when R&D expenditures are expensed, and those
managers may be less willing to authorize R&D projects. This is in spite of the fact that the R&D might be
beneficial for the firm’s long-run profitability.
It might be expected that in response to an accounting standard change, management bonus plans, loan
covenants, and investors’ decision rules would be adapted to allow for the change in reported earnings
brought about solely because of the accounting change. However, there is evidence that such adjust-
ments are not always made.
The estimated Gillette brand value is relevant both to outsiders who wish to value Gillette stock and to
Gillette’s management who wish to monitor the impact of their actions on Gillette’s most valuable asset—
the brand name.
However, reading the description of the 4-stage estimation process casts doubt on the reliability of the
estimate. The valuation estimate requires assumptions about the following quantities:
• An appropriate sales-to-asset ratio
• The baseline return on sales of a generic brand in Gillette’s industry
• Gillette’s marginal tax rate
• The brand strength multiple
Given the assumptions made by Financial World magazine, the computed brand value is $10.3 billion, but
slightly different estimates could result in numbers anywhere from $5 billion to $15 billion.
This may be a good example of a situation in which disclosure is better than recognition. Recognizing a
point estimate of the brand value gives an illusion of precision. Disclosing the brand value in the notes,
along with the assumptions underlying the computation, gives financial statement users a more realistic
impression of the estimated value.
1. Appreciation in asset values is a large part of the business of a real estate firm. Because of this and
because generally accepted accounting rules require long-term assets to be depreciated, many us-
ers of financial statements think that historical cost financial statements for real estate companies
can be particularly uninformative. For a further discussion, see Edward P. Swanson and Frederick
Niswander, “Voluntary Current Value Disclosures in the Real Estate Industry,” Accounting Horizons,
December 1992, p. 49.
2. Daimler-Benz was willing to reveal the magnitude of its hidden reserves in order to comply with U.S.
GAAP as a prerequisite to listing its shares on the New York Stock Exchange.
Hidden reserves are a result of the “prudence principle”: the primary goal of current management is
to make sure that the firm survives into the future to the benefit of stockholders, creditors, employ-
ees, local economies, and so on. One way to build up a financial cushion to increase the probability
of survival is to pay out small cash dividends. In many jurisdictions, the amount of cash dividends is
tied to the amount of reported income. Accordingly, the prudence principle dictates the recording of
accelerated depreciation in order to lower reported income and reduce the payment of cash divi-
dends.
422 Chapter 10
Discussion Case 10–69 (Concluded)
3. SEC dissatisfaction with asset revaluations in the 1920s and 1930s was mainly a result of unease
about the methods used to compute the revaluations, not about the notion of revaluation per se.
When there is an established market for an asset, revaluation to market value is almost as objective
and verifiable as using historical cost. An auditor is understandably wary about appraisals and esti-
mates; however, market values from an active market are not as subjective.
Case 10–70
1. Because Disney has developed its brand name itself instead of purchasing it from another company,
no value is recognized in the financial statements. However, Disney does recognize the costs of reg-
istering and successfully defending its rights and trademarks.
2. In Note 9, Disney discloses: “The Company capitalizes interest on assets constructed for its parks,
resorts, and other property, and on theatrical productions. In 2009, 2008 and 2007, total interest capi-
talized was $57 million, $62 million and $37 million, respectively.”
Supplemental cash flow information at the bottom of Disney’s cash flow statement states that cash
paid for interest in 2009 was $485 million. This cash paid relates to interest reported as interest ex-
pense, not to the capitalized interest.
If it is assumed that all the capitalized interest was paid in cash in 2009, the summary journal entry to
record interest for the year is as follows:
Projects in Progress ............................................. 57
Interest Expense ................................................. 466
Interest Payable…................................................ 19
Cash ($485 + $57) .......................................... 542
3. Note 2 explains Disney’s amortization policy for intangible assets. The following explanation is in-
cluded under the subheading “Goodwill and Other Intangible Assets”:
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment
on an annual basis and between annual tests if current events or circumstances require an interim
impairment assessment. Goodwill is allocated to various reporting units, which are generally an oper-
ating segment or one reporting level below the operating segment. The Company compares the fair
value of each reporting unit to its carrying amount to determine if there is potential goodwill impair-
ment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded
to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value
of its goodwill.
Amortizable intangible assets, principally copyrights, are generally amortized on a straight-line basis
over periods of up to 31 years.
Chapter 10 423
Case 10–70 (Concluded)
4. The business segment information in Note 1 states that capital expenditures for each of Disney’s op-
erating segments were as follows in 2009 (in millions):
Media Networks
Cable Networks……………………………………….. 151
Broadcasting…………………………………………… 143
Parks and Resorts:
Domestic ............................................................ 1,039
International ....................................................... 143
Studio Entertainment ................................................ 135
Consumer Products.................................................. 46
Interactive Media………………………………………. 21
Corporate.................................................................. 75
Total (doesn’t add exactly because of rounding) $1,753
Case 10–71
To: Controller, Hunter Company

From: [Student Name]
Subject: Accounting for the Finch Land Transfer
The land to be transferred from Rosalyn Finch should be recorded as an asset on the books of Hunter
Company. The title to the land is being transferred unconditionally, so there really is no question on this
issue.
The difficult issue here is how to value the land. The two major concerns are as follows:
1. Rosalyn Finch is an officer of the company, so this qualifies as a related-party transaction. The con-
sideration given to Finch may not be an unbiased indication of the fair value of the land. It may be ad-
visable for Hunter Company to commission an external appraisal in order to determine an independ-
ent value for the land.
2. Computing a value for the employment contract and royalty contract given to Finch in exchange for
the machine will be very difficult. Regarding the employment contract, unless it involves an agree-
ment to pay Finch a salary in excess of the fair value of her services, the contract should not be ac-
counted for any differently than any other employment contract—that is, no value should be attached
to the contract. The royalty provision is based on future sales, making the value of the contract diffi-
cult to estimate.
For the two reasons outlined above, every attempt should be made to value the land using an independ-
ent outside appraisal.
424 Chapter 10
Case 10–72
The general outline of facts in this ethical dilemma matches the actual facts of the Chambers Develop-
ment case. The same audit firm had been on the Chambers engagement for a number of years, and for-
mer audit partners from the firm were employed by Chambers.
The heroes in this case were the members of the new team of auditors who were able to overcome the
obvious pressures to cover up the wrongful capitalization of landfill costs.
This case illustrates a difficult conflict between doing what is best for the firm that employs you and doing
what will please your immediate supervisor. If the auditors on the Chambers job had just ignored the ac-
counting irregularities they found, their audit firm could have been liable for huge damages in subsequent
years when the truth was finally revealed. So, it was clearly in the best interests of the audit firm for the
auditors to blow the whistle. However, a staff auditor would still be reluctant to raise the issue with a man-
ager or partner who may have approved the “fishy” accounting in previous years.
The accounting announcement on March 17, 1992, was just the beginning of troubles for Chambers.
Continuing business problems eventually forced the board of directors of Chambers to put the company
up for sale. Chambers was acquired by USA Waste on June 30, 1995.
Articles that contain more information on the interesting Chambers Development case include:
Gabriella Stern and Laurie P. Cohen, "Chambers Development Switches Accounting Plan," The Wall
Street Journal, March 19, 1992, p. B4.
Roula Khalaf, "Fuzzy Accounting," Forbes, June 22, 1992, p. 96.
Gabriella Stern, "Audit Report Shows How Far Chambers Would Go for Profits," The Wall Street Journal,
October 21, 1992, p. A1.
Case 10–73
Solutions to this problem can be found on the Instructor’s Resource CD-ROM or downloaded from the
Web at www.cengage.com/accounting/stice.

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rials, factory overhead, and any other understated. Furthermore, subsequent

PRACTICE 10–1 CATEGORIES OF TANGIBLE NONCURRENT OPERATING ASSETS

PRACTICE 10–2 BASKET PURCHASE

PRACTICE 10–3 DEFERRED PAYMENT

2. Notes Payable.......................................................................... 20,000

PRACTICE 10–4 EXCHANGE OF NONMONETARY ASSETS

Equipment ........................................................................................ 97,300

PRACTICE 10–5 COST OF A SELF-CONSTRUCTED ASSET

Cost of materials............................................................................................ $ 400,000

PRACTICE 10–6 CAPITALIZED INTEREST: SINGLE-YEAR COMPUTATION

1. Amount of capitalized interest = $33,833

PRACTICE 10–7 CAPITALIZED INTEREST: JOURNAL ENTRY

Building ............................................................................................ 33,833

PRACTICE 10–8 CAPITALIZED INTEREST: MULTIPLE-YEAR COMPUTATION

1. Amount of capitalized interest = $111,898

PRACTICE 10–9 ACQUISITION BY DONATION

Land .................................................................................................. 111,000

PRACTICE 10–10 ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION

Mining Site........................................................................................ 800,000

PRACTICE 10–11 RENEWALS AND REPLACEMENTS

Heating/Cooling System ................................................................. 210,000

PRACTICE 10–12 RESEARCH AND DEVELOPMENT

(1) Normal: Expense all—$120,000 + $100,000 = $220,000

PRACTICE 10–13 OIL AND GAS EXPLORATION COSTS

(1) Successful efforts: Expense all costs of dry holes = $400,000.

PRACTICE 10–14 ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY

Cash price .................................................................................. $1,400,000

Cash .................................................................................................. 20,000

PRACTICE 10–15 ACCOUNTING FOR A BARGAIN PURCHASE

Cash price .................................................................................. $ 720,000

Cash .................................................................................................. 20,000

PRACTICE 10–16 INTANGIBLES AND A BASKET PURCHASE

Cost Allocation Cost

Building ............................................................................................ 175,439

PRACTICE 10–17 INTANGIBLES AND A BUSINESS ACQUISITION

Cash .................................................................................................. 100,000

PRACTICE 10–18 FIXED ASSET TURNOVER RATIO

PRACTICE 10–19 DANGER IN USING FIXED ASSET TURNOVER RATIO

10–20. During the construction period, the expenditures will be charged as

10–21. Patents....................................................................................... 19,100*

10–23. Land [($600,000 ÷ 2/3) – $600,000] ............................. 300,000

10–25. Value of the equipment considering interest at 9%

10–26. Trademarks....................................................................... 183,000

10–27. Buildings ............................................................................ 680,000

10–28. Land................................................................................ 885,000*

10–29. Cost to construct special equipment:

10–30. (1) Computation of the amount of interest to be capitalized for 2013 is as

(2) Computation of the amount of interest to be capitalized for 2014 is as

10–33. (a) Wall .................................................................................... 84,000

10–34. 1. All $325,000 should be charged to research and development expenses.

10–36. 1. Successful efforts method:

10–37. (a) Record painting of partitions as an asset. Original painting is consid-

10–38. 1. Cash ............................................................................... 12,000

2. Cash ................................................................................ 12,000

10–39. 1. Accounts Receivable..................................................... 200,000

Cost Allocation Cost

Internet Domain Name ................................................... 141,509