E10.

7 (LO 2) (Capitalization of Borrowing Costs) McPherson Furniture started construction of a

combination office and warehouse building for its own use at an estimated cost of €5,000,000 on
January 1, 2022. McPherson expected to complete the building by December 31, 2022. McPherson
has the following debt obligations outstanding during the construction period.
Construction loan—12% interest, payable semiannually, issued December 31, 2021 €2,000,000
Short-term loan—10% interest, payable monthly, and principal payable at maturity
on May 30, 2023 1,600,000
Long-term loan—11% interest, payable on January 1 of each year. Principal payable
on January 1, 2026 1,000,000
Instructions
(Carry all computations to two decimal places.)
1. Assume that McPherson completed the office and warehouse building on December 31,
2022, as planned at a total cost of €5,200,000. The following expenditures were made
during the period for this project: January 1, €1,000,000; April 1, €1,500,000; July 1,
€2,000,000; and October 1, €700,000. Excess funds from the construction loans were
invested during the period and earned €20,000 of investment income. Compute the
amount of borrowing costs to be capitalized for this project.
2. Compute the depreciation expense for the year ended December 31, 2023. McPherson
elected to depreciate the building on a straight-line basis and determined that the asset has
a useful life of 30 years and a residual value of €300,000.

E10.20 (LO 3) (Non-Monetary Exchange) Yintang Group has negotiated the purchase of a new
piece of automatic equipment at a price of HK$7,000 plus trade-in, f.o.b. factory. Yintang paid
HK$7,000 cash and traded in used equipment. The used equipment had originally cost
HK$62,000; it had a book value of HK$42,000 and a secondhand fair value of HK$45,800, as
indicated by recent transactions involving similar equipment. Freight and installation charges for
the new equipment required a cash payment of HK$1,100.
Instructions
1. Prepare the general journal entry to record this transaction, assuming that the exchange has
commercial substance.
2. Assuming the same facts as in (a) except that fair value information for the assets
exchanged is not determinable, prepare the general journal entry to record this transaction.
E10.26 (LO 5) (Entries for Disposition of Assets) On December 31, 2019, Mitsui Ltd. has a
machine with a book value of ¥940,000. The original cost and related accumulated depreciation at
this date are as follows (all amounts in thousands).
Machine ¥1,300,000
Less: Accumulated depreciation 360,000
Book value ¥940,000
Depreciation is computed at ¥72,000 per year on a straight-line basis.
Instructions
Presented below is a set of independent situations. For each independent situation, indicate the
journal entry to be made to record the transaction. Make sure that depreciation entries are made
to update the book value of the machine prior to its disposal.
1. A fire completely destroys the machine on August 31, 2020. An insurance settlement of
¥630,000 was received for this casualty. The insurance company confirmed on September
30 that the claim would be covered and that the amount of the settlement (¥630,000)
would be paid on October 15.
2. On April 1, 2020, Mitsui sold the machine for ¥1,040,000 to Avanti Company.
3. On July 31, 2020, the company donated this machine to the Mountain King City Council.
The fair value of the machine at the time of the donation was estimated to be ¥1,100,000.