Problem 1—Nonmonetary exchange.

Pop Co. has a machine that cost $425,000 on March 20, 2019. This old machine had
an estimated life of ten years and a salvage value of $25,000. On December 23, 2023,
the old machine is exchanged for a new machine with a fair value of $270,000. The
exchange lacked commercial substance. Pop also received $30,000 cash. Assume that
the last fiscal period ended on December 31, 2022, and that straight-line depreciation is
used.

Instructions
(a) Show the calculation of the amount of gain or loss to be recognized by Pop Co. from
the exchange. (Round to the nearest dollar.)
(b) Prepare all entries that are necessary on December 23, 2023. Show a check of the
amount recorded for the new machine.

Problem 2
It is assumed that the equipment at a cost of $ 500,000 and no residual value is
depreciated using the straight-line depreciation method and it is assumed that on
December 31 2020 the previous fiscal year. On June 1, 2023 the company decided to
dispose of the equipment.

Instructions
Prepare all entries that are necessary on June 1 2023. Show a check of the amount
recorded for the dispose of the equipment

Problem 3—Capitalization of interest.

Early in 2021, Pop Corporation engaged Son, Inc. to design and construct a complete
modernization of Pop manufacturing facility. Construction was begun on June 1, 2021
and was completed on December 31, 2021. Pop made the following payments to Son,
Inc. during 2012:
Date Payment
June 1, 2021 $4,800,000
August 31, 2021 7,200,000
December 31, 2021 6,000,000
In order to help finance the construction, Pop issued the following during 2021:
1. $4,000,000 of 10-year, 9% bonds payable, issued at par on May 31, 2021, with
interest payable annually on May 31.
2. 1,000,000 shares of no-par common stock, issued at $10 per share on October 1,
2021.
In addition to the 9% bonds payable, the only debt outstanding during 2021 was a
$1,000,000, 12% note payable dated January 1, 2017 and due January 1, 2027, with
interest payable annually on January 1.

Instructions
Compute the amounts of each of the following (show computations):
1. Weighted-average accumulated expenditures qualifying for capitalization of interest
cost.
2. Avoidable interest incurred during 2021
3. Total amount of interest cost to be capitalized during 2021.
4. Prepare all entries that are necessary on Dec 31 2021

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Solution 10-144
(a) Cost $425,000
Accumulated depreciation (4 3/4 × $40,000) (190,000)
Book value 235,000
Fair value ($270,000 + $30,000) 300,000
Gain $ 65,000
Gain recognized (30/300 × $65,000) $ 6,500

(b) Depreciation Expense .......................................................... 40,000

Accumulated Depreciation Machinery ...................... 40,000
Accumulated Depreciation Machinery......................................190,000
Machinery.................................................................................211,500
Cash..................................................................................... 30,000
Machinery ................................................................. 425,000
Gain on Disposal of Machinery ................................ 6,500

Check: Fair value $270,000

Deferred gain (58,500)
Basis of new machine $211,500

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