Intermediate Accounting Reporting and Analysis 1St Edition Wahlen Solutions Manual Full Chapter PDF

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CHAPTER 10
Property, Plant, and Equipment: Acquisition and Subsequent Investments
CONTENT ANALYSIS OF END-OF-CHAPTER ASSIGNMENTS
TIME
NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY EST. AACSB AICPA BLOOM’S
Q10-1 Property, Plant, and Characteristics for potential 1 Easy 5 Analytic Measurement Comprehension
Equipment balance sheet inclusion
Q10-2 Property, Plant, and Definition of book value of 1 Easy 5 Analytic Measurement Comprehension
Equipment asset
Q10-3 Property, Plant, and Relationship between fair 1 Easy 5 Analytic Measurement Comprehension
Equipment value and book value of an
asset
Q10-4 Property, Plant, and Criteria for potential balance 2 Easy 5 Analytic Measurement Comprehension
10-1
Equipment sheet inclusion

Q10-5 Land Held as Classification on balance 2 Easy 5 Analytic Reporting Comprehension
Investment sheet
Q10-6 Leasehold Classification on balance 2 Easy 5 Analytic Measurement Comprehension
Improvements sheet
Q10-7 Asset Retirement Classification on balance 2 Easy 5 Analytic Measurement Comprehension
Obligations sheet
Q10-8 Lump-Sum Purchase Allocation of cost among 2 Easy 5 Analytic Measurement Comprehension
of Assets various assets acquired
Q10-9 Acquisition of Asset in Determination of acquisition 2 Easy 5 Analytic Measurement Comprehension
Exchange for cost
Securities
Q10-10 Property, Plant, and Differences between 2 Easy 5 Analytic Measurement Comprehension
Equipment accounting and reporting of
IFRS and GAAP
TIME
Q10-11 Exchange of Assets Accounting for trading of 2 Easy 5 Analytic Measurement Comprehension
nonmonetary assets
Q10-12 Exchange of Assets Recognition of gains and 3 Easy 5 Analytic Measurement Comprehension
losses in exchange of
nonmonetary assets
Q10-13 Self-Construction Accounting for overhead 4 Easy 5 Analytic Measurement Comprehension
costs during self-construction
Q10-14 Interest During Conditions for capitalizing 4 Easy 5 Analytic Measurement Comprehension
Construction interest during self-
construction
Q10-15 Interest During Amount of interest to 4 Easy 5 Analytic Measurement Comprehension
Construction capitalize during self-
construction
Q10-16 Interest During Relevant time period where 4 Easy 5 Analytic Measurement Comprehension
10-2
Construction interest can be capitalized

during self-construction
Q10-17 Interest During Differences between U.S. 5 Easy 5 Analytic Measurement Comprehension
Construction GAAP and IFRS
Q10-18 Capital and Distinguish between capital 5 Easy 5 Analytic Measurement Comprehension
Operating and operating expenditures;
Expenditures accounting differences
between each
Q10-19 Events Subsequent to Accounting for additions and 5 Easy 5 Analytic Measurement Comprehension
Acquisition improvements/replacements
Q10-20 Events Subsequent to Accounting for major repairs 5 Easy 5 Analytic Measurement Comprehension
Acquisition vs. ordinary repairs
Q10-21 Oil and Gas Successful efforts, full-cost 6 Easy 5 Analytic Measurement Comprehension
Accounting methods
M10-1 Lump-Sum Purchase Allocation of cost among 2 AICPA Easy 5 Analytic Measurement Comprehension
various assets acquired
TIME
M10-2 Donation Accounting for donated 2 AICPA Easy 10 Analytic Measurement Comprehension
assets
M10-3 Property, Plant, and 2 AICPA Easy 10 Analytic Measurement Comprehension
Equipment Recording for purchase
M10-4 Property, Plant, and Accounting for costs to tear 2 AICPA Easy 10 Analytic Measurement Comprehension
Equipment down existing building
M10-5 Property, Plant, and Recording for purchase 3 AICPA Easy 10 Analytic Measurement Comprehension
Equipment under deferred payment
contract
M10-6 Exchange of Assets Accounting for exchange 3 AICPA Easy 10 Analytic Measurement Comprehension
with commercial substance
with a gain or loss
M10-7 Interest During Amount of interest to 4 AICPA Moderate 10 Analytic Measurement Application
Construction capitalize during self-
10-3
construction
M10-8 Events Subsequent to Accounting for major repairs 5 AICPA Moderate 10 Analytic Measurement Application
M10-9 Events Subsequent to Accounting for major repairs 5 AICPA Easy 10 Analytic Measurement Comprehension
M10-10 Events Subsequent to Accounting for additions and 5 AICPA Moderate 10 Analytic Measurement Application
Acquisition improvements/replacements
RE10-1 Land Accounting for the cost of 2 Easy 10 Analytic Measurement Comprehension
land
RE10-2 Property, Plant, and Accounting for the cost of a 2 Easy 10 Analytic Measurement Comprehension
Equipment building
RE10-3 Lump-Sum Purchase Allocation of cost among 2 Easy 10 Analytic Measurement Comprehension
various assets acquired
TIME
RE10-4 Property, Plant, and Recording of purchase of 2 Easy 10 Analytic Measurement Application
Equipment equipment using non-
interest-bearing note; journal
entries
RE10-5 Donation Journal entry to record 2 Easy 10 Analytic Measurement Application
receipt of donated property
RE10-6 Exchange of Assets Accounting for exchange 3 Easy 10 Analytic Measurement Application
with commercial substance
with a gain or loss
RE10-7 Interest During Computation of weighted 4 Easy 10 Analytic Measurement Application
Construction average expenditures
interest rate
RE10-8 Interest During Computation of weighted 4 Moderate 10 Analytic Measurement Application
Construction average expenditures and
capitalized interest
10-4
RE10-9 Interest During Computation of capitalized 4 Moderate 10 Analytic Measurement Application

Construction interest
RE10-10 Interest During Computation of capitalized 4 Moderate 10 Analytic Measurement Application
Construction interest
RE10-11 Events Subsequent to Accounting for 5 Moderate Analytic Measurement Application
Acquisition improvements 10
E10-1 Inclusion in Property, Analysis of various items for 1, Moderate 10 Analytic Measurement Analysis
Plant, and Equipment potential balance sheet 2
inclusion; conceptual
extension; next level
E10-2 Determination of Cost Analysis of numerous items to 2, Moderate 10 Analytic Measurement Analysis
determine whether or not to 4,
include in property, plant, 5
and equipment; next level
TIME
E10-3 Acquisition Costs Compute total acquisition 2, Easy 5 Analytic Measurement Application
costs of machine; journal 5
entries
E10-4 Acquisition Cost Journal entry to record 2 Moderate 10 Analytic Measurement Analysis
acquisition; discussion of
situation where price is not
available; conceptual
E10-5 Acquisition Cost Determination of cost and 2 AICPA Easy 10 Analytic Measurement Application
journal entry to record
acquisition
E10-6 Acquisition of Land Computation of land and 2 AICPA Moderate 10 Analytic Reporting Analysis
and Building new building cost;
conceptual extension; next
level
10-5
E10-7 Lump-Sum Purchase Cost assigned to land, 2 Moderate 10 Analytic Measurement Analysis
buildings, and equipment;
international journal entries;
IFRS
Asset Acquired by Journal entry to record 2 Moderate 15 Analytic Reporting Analysis
E10-8 Donation acquisition; conceptual
extension; financial
statement disclosure; time
differences for passage of
title; next level
E10-9 Exchange of Assets No cash; journal entries when 3 Moderate 15 Analytic Measurement Application
exchange does and does
not have commercial
substance; conceptual
TIME
E10-10 Exchange of Assets Cash, gain, and loss; 3 Moderate 15 Analytic Measurement Analysis
exchange with commercial
substance; journal entries
E10-11 Exchange of Assets Cash, gain, and loss; 3 Moderate 15 Analytic Measurement Application
E10-12 Exchange of Assets No cash; exchange with 3 Moderate 15 Analytic Measurement Application
commercial substance;
journal entries
E10-13 Exchange of Assets Cash, gain, and loss; 3 Moderate 15 Analytic Measurement Analysis
E10-14 Exchange of Assets Determination of amount to 3 AICPA Easy 10 Analytic Measurement Analysis
be shown in the accounting
records
10-6
E10-15 Self-Construction Determination of amount to 4 Moderate 10 Analytic Measurement Analysis

be capitalized; conceptual
extension; evaluation under
differing outside contractor’s
bids; next level
E10-16 Interest During Computation of weighted 4 Moderate 10 Analytic Measurement Analysis
Construction average expenditures and
capitalized interest
Interest During Compilation of amount to be 4 Moderate 10 Analytic Reporting Analysis
E10-17 Construction capitalized; conceptual
extension; financial
statement disclosure; next
level
TIME
E10-18 Calculating Compute amount of 4 Moderate 15 Analytic Measurement Analysis

Capitalized Interest capitalized interest and
interest revenue; IFRS
computations of capitalized
interest
E10-19 Capital and Capital vs. operating; 5 Moderate 10 Analytic Measurement Analysis
Operating classification of various items;
Expenditures IFRS differences
E10-20 Expenditures After Capitalization vs. expensing 5 Moderate 10 Analytic Reporting Analysis
Acquisition of expenditures incurred after
acquisition; journal entries;
conceptual extension; effect
on financial statements; next
level
E10-21 Oil and Gas Successful efforts, full-cost 6 Moderate 15 Analytic Reporting Analysis
10-7
Accounting methods; determination of

expense and balance sheet
value
P10-1 Acquisition Costs Reclassification of 2, Challenging 25 Analytic Measurement Analysis
erroneously recorded items; 4
journal entries.
P10-2 Asset Cost Journal entries to record 2, Moderate 30 Analytic Reporting Analysis
Classification various transactions 5
P10-3 Acquisition Cost Acquisition, replacement, 2, Moderate 25 Analytic Measurement Analysis
purchase; journal entries to 5
record various transactions
Comprehensive: Preparation of schedules for 2, AICPA Challenging 30 Analytic Reporting Synthesis
P10-4 Analysis of Changes changes in land, building, 5
in Fixed Assets leasehold improvements,
and machinery and
equipment
TIME
P10-5 Assets Acquired by Various situations dealing 3 Challenging 35 Analytic Measurement Synthesis
Exchange with exchanges of
nonmonetary assets when
commercial substance exists;
journal entries
P10-6 Assets Acquired by Various situations dealing 3 Challenging 35 Analytic Measurement Synthesis
Exchange with exchanges of
nonmonetary assets when
commercial substance does
and does not exist; journal
entries; conceptual
P10-7 Self-Construction Computation according to 4 CMA Challenging 40 Analytic Measurement Synthesis
GAAP of amount to be
capitalized; conceptual
10-8
extension; identification of
alternative procedures; next
level
Interest During Computation of amount to 4 Moderate 25 Analytic Reporting Analysis
P10-8 Construction be capitalized and amount
to be depreciated; straight-
line depreciation;
conceptual extension;
effects on financial
statements; next level
P10-9 Interest During Computation of amounts of 4 Moderate 50 Analytic Measurement Analysis
Construction capitalized interest, interest
expense, and interest
revenue; journal entries to
record construction costs,
including interest; IFRS
differences
TIME
P10-10 Events Subsequent to Replacement, repairs, 5 Moderate 25 Analytic Measurement Analysis

Acquisition demolition; journal entries;
IFRS differences
P10-11 Oil and Gas Successful efforts, full-cost 6 Moderate 15 Analytic Reporting Analysis
Accounting Methods methods; financial statement
disclosure; next level
C10-1 Acquisition Determining the cost of 2, AICPA Moderate 20 Analytic Measurement Analysis
equipment by establishing 3,
value of what was traded to 5
acquire it
C10-2 Capitalization Issues Analysis of various items for 2, AICPA Moderate 20 Analytic Measurement Analysis
potential balance sheet 5
inclusion; conceptual
extension
C10-3 Cost Issues Determination of cost to 2, AICPA Moderate 20 Analytic Reporting Analysis
10-9
record acquisition; 5
accounting of maintenance
costs
C10-4 Acquisition Costs Costs capitalized for land; 2, AICPA Moderate 20 Analytic Measurement Application
recording plant asset 3
acquired by deferred
payments; accounting for
exchange of nonmonetary
assets
C10-5 Capital and Revenue Accounting for capital and 2, AICPA Moderate 20 Analytic Measurement Analysis
Expenditures operating expenditures; 5
decisions of what is
capitalized versus expensed
C10-6 Interest Capitalization Developing policies for 4 Moderate 20 Analytic Measurement Synthesis
capitalizing interest; earnings
management concerns
TIME
C10-7 Capitalization of Accounting for purchase 2 Moderate 20 Analytic Measurement Analysis

Purchase Options options
C10-8 Donated Asset and Its Consideration for accounting 2 Moderate 20 Analytic Measurement Analysis
Modification for donated assets
C10-9 Exchange of Assets Lease options; asset 2, AICPA Moderate 20 Analytic Reporting Analysis
exchange; evaluating 3
alternative accounting
scenarios
C10-10 Ethics and Ethics; capitalizing overhead 4 Moderate 20 Analytic Measurement Analysis
Construction Costs costs; capitalizable interest
during self-construction
C10-11 Analyzing Coca- Using real company annual Moderate 20 Analytic Measurement Analysis
Cola's Property, Plant, reports
and Equipment
10-10
C10-12 Analyzing LVMH's Using real company annual Moderate 25 Analytic Measurement Application
Property, Plant, and reports
Equipment
C10-13 Researching GAAP Using the FASB Codification Moderate 25 Analytic Measurement Analysis
System
C10-14 Researching GAAP Using the FASB Codification Moderate 25 Analytic Measurement Analysis
System
ANSWERS TO QUESTIONS
Q10-1 For a company to include an asset in the category of property, plant, and
equipment, the asset must: (1) be held for use in operations and not for investment;
(2) have an expected life of more than one year; and (3) be tangible in nature—that
is, having a physical substance that can be seen and touched.
Q10-2 The book value of an asset is the recorded acquisition cost less the accumulated
depreciation recorded to date.
Q10-3 At the date of acquisition, the acquisition cost is equal to the fair value. At the end of
the life of the asset, the book value should equal the residual value (a market value).
During the life of the asset, there is no defined relationship between the book value
and market value because depreciation is a process of cost allocation rather than of
valuation.
Q10-4 Generally, a company capitalizes the expenditures that are necessary to obtain the
benefits to be derived from the asset. Specifically, any expenditure necessary to
obtain the asset and put it in operating condition is capitalized, or recorded as part
of the cost of property, plant, and equipment. These expenditures include the
contract price, less any discounts taken, plus freight, assembly, installation, and
testing costs. In addition, any costs associated with an asset retirement obligation are
capitalized as property, plant, and equipment.
Q10-5 A company classifies land purchased for future use as an investment on the balance
sheet. It does not include the land as property, plant, and equipment because it is
not being used in the normal course of business in a productive capacity. Therefore,
classification of the land as an investment is more representationally faithful.
Q10-6 Leasehold improvements are improvements made by the lessee to leased property
that, unless specifically exempted in the lease agreement, revert to the lessor at the
end of the lease. A company capitalizes the cost of these improvements and
subsequently depreciates them over the economic life of the improvements or the
life of the lease (lease term), whichever is shorter.
Q10-7 Asset retirement obligations are legal obligations related to the retirement of an
asset. The fair value of an asset retirement obligation is recorded as a liability, with an
offsetting increase in the carrying value of the related asset. Generally, the fair value
is estimated by calculating the present value of the estimated future cash outflows
required to satisfy the obligation at the end of the asset’s useful life. The capitalized
amount is subsequently depreciated and accretion expense is periodically
recognized on the amount of the obligation. This subsequent accounting is discussed
in Chapter 11.
Q10-8 In a lump-sum purchase, the company allocates the total purchase price to the
individual assets based on their relative fair values. This allocation is necessary
because the purchased assets may have different characteristics (e.g., some may
be depreciable while others are not, the assets may have different economic lives
and salvage values) or may be depreciated by different methods.
10-11
Q10-9 When a company exchanges securities (e.g., common or preferred stock) for an
asset, the acquisition cost of that asset is either the fair value of the asset acquired or
the fair value of the stock issued, whichever is more clearly evident and
representationally faithful. In many situations, the company makes the choice on the
basis of the market value that is more representationally faithful – e.g., if the value is
readily observable in an active market. If neither of these amounts is known, the
company must assign the value that it believes to be the most faithful representation
of the transaction.
Q10-10 The primary difference between U.S. GAAP and IFRS is that IFRS allow a company to
subsequently value its property, plant, and equipment using either a cost model
(similar to U.S. GAAP) or a revaluation model. Under the revaluation model, a
company is allowed to write the value of its property, plant, and equipment up to fair
value if fair value can be reliably measured. If the property, plant, and equipment is
increased to fair value, the increase is recognized in other comprehensive income
and accumulated in shareholders’ equity as a revaluation surplus. If the fair value of
the asset decreases, a company must first reduce any previously recognized
revaluation surplus. Any remaining decrease is then recognized as an expense.
Q10-11 When nonmonetary assets are exchanged, a company records the cost of the
nonmonetary asset acquired at the fair value of the nonmonetary asset surrendered
plus (minus) cash paid (received). If the fair value of the nonmonetary asset received
is more clearly evident than the fair value of the asset surrendered, it can be used to
measure the cost of the nonmonetary asset acquired.
Q10-12 When nonmonetary assets are exchanged, the company recognizes a gain or loss
equal to the difference between the fair value and the book value of the
nonmonetary asset surrendered.
Q10-13 The two alternative treatments of fixed overhead costs are (1) to allocate a portion
of overhead to the self-constructed asset and (2) to include only the incremental
overhead in the cost of the self-constructed asset. Proponents in favor of the first
approach (the allocation of total overhead) argue that construction-related
overhead is a relevant component of the asset’s cost and should be accounted for
in the same way as regular products. In addition, this full-costing approach results in a
cost of a self-constructed asset that will be a more faithful representation of the cost
to acquire and prepare the asset for use. Similarly, this approach enhances
comparability with the cost of an equivalent purchased asset. Arguments in favor of
the second approach (including only the incremental overhead) are that, to be
representationally faithful, the cost of the asset should only include the additional
costs incurred to produce it. In addition, to be comparable, the allocation of
overhead to normal operations should not change because the overhead would
have been incurred whether or not the construction takes place. Therefore, to
allocate any amount other than incremental overhead would result in less overhead
being allocated to inventory, resulting in lower expenses and higher income.
10-12
Q10-14 A company capitalizes interest on the self-construction when:
• The asset is constructed for a company’s own use or as a discrete project for sale
or lease to others
• The asset requires a period of time to get it ready for its intended use during which
expenditures have been made, activities that are necessary to get the asset
ready for its intended use are in progress, and interest cost is being incurred
A company does not capitalize interest for the following types of assets:
• Inventories that are routinely manufactured or otherwise produced on a
repetitive basis
• Assets that are in use or ready for their intended use
• Assets that are idle (not being used in the earning activities of the company) and
are not undergoing the activities necessary to get them ready for use
Q10-15 The amount of interest capitalized for a self-constructed asset is that portion of the
interest cost that could have been avoided if the construction had not occurred. The
company determines the amount of interest that it capitalizes by applying an interest
rate to the weighted average accumulated expenditures for the qualifying asset
during the capitalization period.
Q10-16 Because activities that are necessary to get the asset ready for its intended use are in
progress, the asset qualifies for interest capitalization. The interest cost capitalized is
considered a cost of acquiring the building and is recorded in the building account.
Q10-17 While both U.S. GAAP and IFRS permit the capitalization of interest, IFRS allow for the
capitalization of the total amount of interest related to specific construction loans
while U.S. GAAP only allows capitalization of avoidable interest. In addition, IFRS allow
for interest revenue from the temporary investment of funds borrowed specifically for
construction to be offset against interest expense eligible for capitalization. This
offsetting is not allowed under U.S. GAAP.
Q10-18 The distinction between a capital expenditure and an operating expenditure is

based on whether the costs have increased the future economic benefits of the
asset above those that were originally expected. If the future economic benefits of
the asset are increased, the expenditure is a capital expenditure and is recorded as
an asset. The future economic benefits can be increased by extending the life of the
asset, improving productivity (producing a greater quantity at the same cost or
producing the same quantity of product at a lower cost), or increasing the quality of
the product. If the costs maintain the existing benefits, the expenditure is an
operating (or revenue) expenditure. For example, if a machine receives a major
overhaul that increases the benefits to be realized from the asset, the costs are
capitalized. Conversely, ordinary repairs do not increase the total benefits to be
realized but maintain the existing benefits. Therefore, these expenditures are
expensed. As another example, the cost of adding a new wing to an existing hospital
is capitalized since it increases the total benefits of the hospital, whereas repairing the
elevators does not increase the economic benefit of the hospital and is expensed.
10-13
Q10-19 An addition involves enlarging an existing asset by adding a new component. In
contrast, an improvement/replacement involves the substitution of a new part or
asset for an old one. In accounting for an addition, a company capitalizes the costs
of the addition, and removes from the accounts any portion of the old asset that is
demolished or removed. A company capitalizes improvement and replacement
costs using the substitution method when it knows the book value of the asset being
replaced. This method removes the book value of the old asset and records the cost
as a new asset. If a company does not know the old book value, it still capitalizes the
cost of the new asset, but with either a debit to the Accumulated Depreciation
account of the old asset (if the expenditure extends the service life of the asset) or a
debit to the old asset account (when the old asset has been sufficiently depreciated
to an immaterial amount).
Q10-20 The costs of ordinary repairs and maintenance are expenditures that do not increase
the future economic benefits of the asset but, instead, maintain the existing benefits
provided by the asset. These costs are expensed as they are incurred. Major repairs
are those that cannot be foreseen and do not occur in the usual course of
operations, such as emergency repairs to a machine that breaks down during
production. Usually, a company expenses these costs, but care should be taken to
note whether these repairs increase the future benefits of the asset. If they do, then
the company capitalizes the costs.
Q10-21 Under the successful-efforts method of accounting for oil and gas properties, a
company capitalizes only those costs incurred in drilling for successful wells while it
expenses the costs of unsuccessful wells. In contrast, under the full-cost method a
company capitalizes all costs of drilling wells, whether the drilling was successful or
not, and amortizes these costs as the oil and gas is produced.
ANSWERS TO MULTIPLE CHOICE
1. c 3. b 5. c 7. c 9. d
2. b 4. c 6. d 8. b 10. b
SOLUTIONS TO REVIEW EXERCISES
RE10-1
Cost of land: $55,000 + $2,000 + $7,500 = $64,500
RE10-2
Cost of building: $250,000 + $3,500 + $125,000 = $378,500
10-14
RE10-3
Appraisal Relative Total Allocated

Asset Value Fair Value × Cost = Cost
Land $100,000 25% $360,000 $ 90,000
Building 300,000 75% 360,000 270,000
Totals $400,000 $360,000
RE10-4
Amount to be paid off each year: $350,000 ÷ 7 = $50,000
Use the Time Value of Money Module, Table 4 (Present Value of an Ordinary Annuity),
where n = 7, i = 10%, factor of 4.868419
$50,000 × 4.868419 = $243,421 (rounded)
Journey entry:
Equipment ........................................................................................ 243,421
Discount on Notes Payable ........................................................... 106,579
Notes Payable ........................................................................... 350,000
RE10-5
Land ................................................................................................... 400,000

Gain on Receipt of Donated Property................................. 400,000
RE10-6
Cost of asset acquired = Fair value of asset surrendered – Cash received

Cost of asset acquired = $40,000 – $2,000
Cost of asset acquired = $38,000
Gain (loss) = Fair value of asset surrendered – Book value of asset surrendered
Gain (loss) = $40,000 – $25,000
Gain = $15,000
RE10-7
Weighted average interest rate:
$3,000,000 × 12% = $360,000

1,800,000 × 10% = 180,000
$4,800,000 $540,000
$540,000
= 11.25%
$4,800,000
10-15
RE10-8
Portion of Weighted Average

Expenditures Year Outstanding Accumulated Expenditures
Jan. 1 $ 300,000 × 12/12 = $ 300,000
Mar. 1 600,000 × 10/12 = 500,000
June 30 1,000,000 × 6/12 = 500,000
Nov. 1 480,000 × 2/12 = 80,000
$2,380,000 $1,380,000
RE10-9
Capitalized interest = Weighted average accumulated expenditures x Interest rate

Capitalized interest = $1,380,000 × 10%*
Capitalized interest = $138,000
*Because Dexter’s weighted average accumulated expenditures do not exceed its borrowing
on the project, Dexter uses the interest rate on the note specific to this project to calculate its
capitalized interest.
RE10-10
Capitalized interest:
$1,000,000 × 10% = $100,000

380,000 × 11.25% = 42,750
$1,380,000 $142,750
RE10-11
Note: Rick has two alternatives. The substitution method is not applicable to this situation
because the engines were improved and not replaced.
Alternative 1: Reduce accumulated depreciation

Accumulated Depreciation.......................................................... 55,000
Cash ............................................................................................ 55,000
Alternative 2: Increase the asset account

Trucks ................................................................................................. 55,000
Cash ............................................................................................ 55,000
10-16
SOLUTIONS TO EXERCISES
E10-1
1. The following are included in property, plant, and equipment:

b. Machinery kept on hand and used only when other machinery breaks
e. Progress payments on building being constructed
f. Fully depreciated assets still being used
g. Expenditures to improve leased property
j. Obligation to remove leasehold improvement at the termination of a lease
The following are not included in property, plant, and equipment:
a. Idle equipment awaiting sale
c. Land held for investment
d. The right to publish a literary work
h. Assets leased to others
i. Purchase of an asset with an expected life of nine months
2. a. Idle equipment awaiting sale is not being used in operations. It is normally

classified as an “other asset.”
c. Land held for investment is not being used in operations. It would be considered
an investment.
d. The right to publish a literary work is not tangible in nature. This copyright is
considered an intangible asset.
h. Equipment leased to others is classified as inventory.
i. To be classified as property, plant, and equipment, the asset must have an
expected life of more than one year.
E10-2
1. The following are included in the cost:

a. Contract price of a machine
c. Freight costs
f. Installation costs
g. Testing costs
h. Cost of major overhaul of equipment
i. Costs of grading land prior to construction
j. Tax assessment for street improvements
k. Delinquent property taxes on property acquired
m. Cost of insurance during construction (could be expensed)
n. Avoidable interest costs during construction (not imputed interest)
o. Landscaping costs
q. Cost of tearing down a building on newly acquired land
r. Replacement of an electric motor in a machine (if benefits are increased)
s. Expansion of the heating/cooling system
10-17
E10-2 (concluded)
The following are not included in the cost:

b. List price
d. Discounts taken
e. Discounts not taken*
l. Cost of tearing down an old building (already owned)
p. Severance pay for employees dismissed because of acquisition
t. Purchase price of a service contract for 2 years on the acquired asset
u. Cost of training new employees
*Note: GAAP allows discounts not taken to either be included as part of the cost of
property, plant, and equipment or excluded and reported as an expense. Because
most companies report this an expense, we exclude discounts not taken from the cost
of property, plant, and equipment.
2. In general, if incurring a cost will provide economic benefits for the company beyond the
current period, it should be capitalized as part of the asset that is associated with the
increased benefit.
E10-3
Machine ............................................................................................ 213,000*

Repair and Maintenance Expense .............................................. 1,000
Cash ............................................................................................ 214,000
*$200,000 – ($200,000 × 0.02) + $5,000 + $10,000 + $2,000
E10-4
1. The cost of the machine is determined as the fair value of the asset acquired or the sum
of the fair value of the note payable and the preferred stock issued, whichever is more
clearly evident. In this case, the fair value of the asset is considered to be the cash price
of $215,000. This amount is more clearly evident than the sum of the fair value of the
liability and the fair value of the preferred stock. Therefore, the machine is recorded at
$215,000.
2. Because the cost of the machine is $215,000 and a $55,000 cash down payment is
made, the remaining $160,000 has to be allocated between the note and the preferred
stock. In most situations, it would be considered that the 10% fair value of the note is
more clearly evident than the fair value of the preferred stock (an agreed-upon value is
not an independent and verifiable estimate of fair value). The fair value of the note
payable is determined as:
Present value of note:
Four annual payments of $ 30,000
Present value factor n = 4, I = 10%* × 3.169865
$ 95,095.95
*Factor from Table 4 of TVM Module
10-18
E10-4 (concluded)
Therefore, the note payable is valued at $95,095.95 and the preferred stock is valued at
the remaining amount of $64,904,05 ($160,000 – $95,095.95). The journal entry to record
this acquisition is:
Machine ............................................................................................ 215,000.00
Discount on Notes Payable ($120,000 – $95,095.95)................. 24,904.05
Notes Payable ........................................................................... 120,000.00
Preferred Stock, $100 par ($100 × 600) ................................. 60,000.00
Additional Paid-in Capital on Preferred Stock .................... 4,904.05
Cash ............................................................................................ 55,000.00
3. If the $215,000 cash price were not known, the fair value of the note and the agreed
value of the preferred stock would be used to determine the cost of the machine.
Machinery [($120,000 – $24,904.05) + $55,000 + $60,000] ........ 210,095.95
Discount on Notes Payable ........................................................... 24,904.05
Notes Payable ........................................................................... 120,000.00
Preferred Stock, $100 par ........................................................ 60,000.00
Cash ............................................................................................ 55,000.00
E10-5 [AICPA Adapted]
Cash equivalent price .................................................................... $9,500

Installation costs............................................................................... 300
Capitalized cost .............................................................................. $9,800
Machine ............................................................................................ 9,800

Cash ($1,000 + $300) ................................................................ 1,300
Notes Payable (2,500 × 4) ...................................................... 10,000
The asset should be recorded at its cash equivalent price of $9,500 plus installation costs of $300.
The imputed interest related to the note is recognized as a discount on the note payable.
1. Land:
Purchase price ............................................................ $50,000
Demolition of old building ......................................... 4,000
Legal fees ..................................................................... 2,000
Salvaged materials..................................................... (3,000)
$53,000
Building:
Architect’s fees ........................................................... $ 20,000
Construction costs ...................................................... 500,000
$520,000
10-19
E10-6 (concluded)
2. If a portion of the cost of the building was misclassified as land, the amount reported for
building would be understated and the amount reported for land would be overstated.
However, in total, the initial amount reported for property, plant, and equipment would
be correctly stated. Because depreciation would not be taken on the costs misclassified
as land, property, plant, and equipment would be overstated in future periods. In
addition, future income statements would understate depreciation expense, resulting in
an overstatement of net income and shareholders’ equity.
E10-7
1. Acquisition cost .................................................................. $200,000

Appraisal ............................................................................. 20,000
Total cost ............................................................................. $220,000
Appraisal
Values % of Total
Land ..................................................................................... $100,000 40%
Building ................................................................................ 125,000 50%
Equipment ........................................................................... 25,000 10%
Total value ........................................................................... $250,000 100%
Cost assigned to:

Land 40% × $220,000 = $ 88,000
Building 50% × $220,000 = 110,000
Equipment 10% × $220,000 = 22,000
Total cost assigned $220,000
2. With regard to the land, Garrett will recognize the increase in fair value as follows:
Land ..................................................................................... 22,000
Revaluation Surplus .................................................... 22,000
With regard to the buildings, Garrett will first eliminate any previously recorded
depreciation:
Accumulated Depreciation ............................................ 6,000*
Buildings ........................................................................ 6,000
*Original cost of $110,000 less book value of $104,000
Next, the increase in value from $104,000 to $106,000 is recorded as follows:

Buildings ............................................................................... 2,000
Revaluation Surplus ................................................... 2,000
With regard to the equipment, Garrett records the decrease in value from $18,000 to
$15,000 as a current period loss:
Loss on Impairment ........................................................... 3,000
Equipment .................................................................... 3,000
Note to Instructor: Impairments will be discussed more fully in Chapter 11.
10-20
E10-8
1. Land ..................................................................................... 65,000

Building ................................................................................ 44,000
Gain on Receipt of Donated Property ................... 109,000
2. The agreement to employ 350 people for 10 years is disclosed in a note to the financial
statements, if material.
3. Even though title would not pass to the company for 10 years, the land and building is still
recorded on the books of the company. Disclosure of the contingency associated with
the title is included in the notes to the financial statements.
Note to Instructor: Contingencies were discussed in Chapter 9.
E10-9
1. Denver Company
Building (Warehouse (new)) ............................................ 30,000a
Accumulated Depreciation: Building............................ 55,000
Loss on Exchange ............................................................. 5,000b
Building (Warehouse (old)) ....................................... 90,000
aCost = Fair value of asset surrendered
bLoss = Fair value of asset surrendered – Book value of asset surrendered
= $30,000 – $35,000
Bristol Company
Gain on Exchange ..................................................... 10,000b
bGain = Fair value of asset surrendered – Book value of asset surrendered
= $30,000 – $20,000
2. Denver Company
Loss on Exchange .............................................................. 5,000b
= $30,000 – $35,000
10-21
E10-9 (concluded)
Bristol Company
Building (Warehouse (new)) ............................................ 20,000*
*Cost = Fair value of asset surrendered – Gain
where:
Gain = Fair value of asset surrendered – Book value of asset surrendered
= $30,000 – $20,000
3. The different accounting is justified because when an exchange has commercial

substance, the economic position of the two companies has changed and the
company’s future cash flows are expected to significantly change as a result of the
exchange. Therefore, any gains and losses are recognized at the time of the exchange.
However, when the exchange lacks commercial substance, the two companies are in
the same economic position. Therefore, while conservatism allows losses to be
recognized, a company will defer any gains until a transaction which alters the
company’s cash flows occurs.
E10-10
Denver Company
Building (Warehouse (new)).......................................................... 30,000a
Accumulated Depreciation: Building ......................................... 55,000
Loss on Exchange ............................................................................ 7,000b
Building (Warehouse (old)) ..................................................... 90,000
Cash ............................................................................................ 2,000
= $28,000 – $35,000
aCost = Fair value of asset surrendered + Cash paid
= $28,000 + $2,000
Bristol Company
Cash ................................................................................................... 2,000
Gain on Exchange ................................................................... 10,000b
aCost = Fair value of asset surrendered – Cash received
= $30,000 – $2,000
= $30,000 – $20,000
10-22
E10-11
Denver Company
Loss on Exchange ............................................................................ 2,000b
Cash ................................................................................................... 3,000
= $33,000 – $3,000
= $33,000 – $35,000
Bristol Company

Cash ............................................................................................ 3,000
= $30,000 + $3,000
= $30,000 – $20,000
E10-12
Goodman Company
Truck ................................................................................................... 9,000a
Accumulated Depreciation: Machine ....................................... 24,000
Machine ..................................................................................... 30,000
= $9,000 – $6,000
Harmes Company
Machine ............................................................................................ 9,000a
Accumulated Depreciation: Truck .............................................. 4,000
Truck ............................................................................................ 12,000
aCost = Fair value of asset surrendered ($9,000, since no cash paid or received)
= $9,000 – $8,000
10-23
E10-13
Goodman Company
Truck ................................................................................................... 9,000a
Accumulated Depreciation: Machine ....................................... 24,000
Machine ..................................................................................... 30,000
Cash ............................................................................................ 500
aCost = Fair value of asset surrendered + Cash paid = $8,500 + $500
= $8,500 – $6,000
Harmes Company
Machine ............................................................................................ 8,500a
Cash ................................................................................................... 500
Truck ............................................................................................ 12,000
= $9,000 – $500
= $9,000 – $8,000
Minor will value Smith’s contract at $150,000. Better will value Doe’s contract at $150,000. Minor
will report a gain of $5,000 and Doe will report a gain of $10,000.
E10-15
1. Common practice allocates both variable overhead and a pro rata share of fixed
overhead to the cost of the constructed asset. Following this practice, the cost of the
constructed asset should be as follows:
Materials and supplies $20,000
Direct labor 48,000
Supervisor’s overtime 4,000
Overhead (50% of direct labor) 24,000
$96,000
2. Allocating a portion of overhead to the cost of the self-constructed asset is a full-costing

approach that treats construction in the same manner as regular products. Under this
approach, the cost of the constructed asset will more closely approximate the cost of an
equivalent purchased asset.
10-24
E10-15 (concluded)
3. If the bid from the outside contractors was $80,000, it is questionable whether the use of
the full overhead rate is appropriate as the cost of the asset appears to be greater than
its fair value. The incremental approach seems more reasonable in this situation. If
Harshman does use a full-cost approach and the $80,000 bid is determined to be the fair
value of the asset, Harshman has incurred excessive costs to construct the building. The
building should be recorded at its fair value of $80,000 and the excess costs should be
recorded as a loss in the current period.
E10-16
1. Weighted average accumulated expenditures are calculated as:

Portion of Year Weighted Average
Expenditures Outstanding Accumulated Expenditures
Jan. 1 $ 252,000 × 10/12 = $210,000
May 1 310,000 × 6/12 = 155,000
July 1 420,000 × 4/12 = 140,000
Oct. 31 276,000 × 0/12 = 0
$1,258,000 $505,000
Note: Interest costs related to the expenditure for land qualify for interest capitalization.
Any interest costs capitalized are included as part of the cost of the building, not the
land.
Avoidable interest is calculated as:

$505,000 × 8% = $40,400
Actual interest is calculated as:

$1,000,000 × 8% = $ 80,000
500,000 × 9% = 45,000
800,000 × 10% = 80,000
$205,000
Because avoidable interest is less than actual interest, avoidable interest of $40,400 is
capitalized.
2. If the expenditures are incurred evenly throughout the year, the expenditures eligible for
interest capitalization are the average accumulated expenditures of $629,000 [($0 +
$1,258,000) ÷ 2].
Under this assumption, avoidable interest of $50,320 ($629,000 × 0.08) is capitalized as
part of the cost of the building.
10-25
E10-17

Apr. 1 $ 396,000 × 9/12 = $297,000
July 1 400,000 × 6/12 = 200,000
Sept. 1 510,000 × 4/12 = 170,000
Dec. 1 120,000 × 1/12 = 10,000
$1,426,000 $677,000

$ 500,000 × 12% = $60,000
177,000 × 8 1/3%* 14,750
$ 677,000 $74,750
Total interest $250,000
*Weighted average interest rate = = = 8 1/3%
Total principal $3,000,000

$ 500,000 × 12% = $ 60,000
2,000,000 × 8% = 160,000
1,000,000 × 9% = 90,000
$310,000
capitalized.
2. In the current period, the capitalization of interest increases the cost of the building,
decreases expenses (interest expense is not recorded for the amount of interest
capitalized), increases net income, and increases shareholders’ equity. However, in
future periods, the higher amount recorded as an asset increases depreciation expense
each year of the assets’ life, which lowers future net income and shareholders’ equity.
E10-18

Jan. 1 $1,000,000 × 12/12 = $1,000,000
April 1 1,600,000 × 9/12 = 1,200,000
Oct. 1 1,200,000 × 3/12 = 300,000
Dec. 31 500,000 × 0/12 = 0
$4,300,000 $2,500,000

$2,500,000 × 12% = $300,000
10-26
E10-18 (concluded)

$5,000,000 × 12% = $600,000
capitalized.
2. Interest revenue from the temporary investment of the borrowed amounts is:
Amount Interest Portion Interest
Date Available Rate of Year Revenue
January 1 $4,000,000 11% 3/12 $110,000
April 1 2,400,000 11% 6/12 132,000
Oct. 1 1,200,000 11% 3/12 33,000
$275,000
3. Under IFRS, the total interest costs of loans obtained specifically for the purpose of
constructing a qualifying asset are eligible for interest capitalization. Therefore, the total
interest expense of construction-related borrowing of $600,000 is eligible for interest
capitalization. In addition, interest revenue from the temporary investment of amounts
borrowed specifically for construction is offset against interest costs eligible for
capitalization. Therefore, Kit would capitalize $325,000 ($600,000 – $275,000).
E10-19
1. The following are recorded as capital expenditures:

a. Cost of installing machinery
b. Cost of moving machinery
d. Cost of major overhaul
e. Installation of safety device (unless no economic benefits are realized)
g. Replacement of a roof on a factory building
h. Cost of rearranging offices
The following are recorded as operating expenditures:
c. Repairs as a result of an accident
f. Property taxes on land and buildings
i. Cost of repainting offices
j. Ordinary repairs
2. Under IFRS, the cost of relocating or reorganizing PP&E is expensed. Therefore, the
company would record the cost of moving machinery and the cost of rearranging
offices as operating expenditures. The company would record the remaining costs in the
same way as it would under U.S. GAAP.
10-27
E10-20
1. April 9 Air Conditioning System (New) .............................................. 83,000

Accumulated Depreciation:
Air Conditioning System (Old) ............................................ 72,000
Loss on Disposal of Property, Plant, and Equipment ......... 2,000
Air Conditioning System (Old) ......................................... 74,000
Cash ..................................................................................... 83,000
June 29 Repair & Maintenance Expense ........................................... 38,000
Cash ..................................................................................... 38,000
Sept. 12 Accumulated Depreciation: Building .................................. 65,000
Cash ..................................................................................... 65,000
Dec. 28 Building ....................................................................................... 275,000
Cash ..................................................................................... 275,000
2. a. If the addition had been expensed instead of capitalized, assets and net income
would be have been understated by $275,000 in the year of the addition.
However, in future years, because no asset was recorded, there would be no
additional depreciation expense related to the addition. Therefore, income
would be higher in future periods.
b. If the maintenance expenditures had been capitalized, assets and net income
would be overstated in the year of the expenditure. In future periods, this asset
would be depreciated, causing income to be understated.
E10-21
1. a. Successful-efforts method. 40% of drilling is unsuccessful. Therefore:
40% × $4,000,000 = $1,600,000 is expensed
b. Full-cost method. All costs are capitalized, so no drilling expense is recognized.
2. Value of Oil and Gas Properties on balance sheet (before recording depletion):
a. Successful-efforts method. 60% of drilling efforts are successful. Therefore:

60% × $4,000,000 = $2,400,000 appears on the balance sheet as oil and gas
properties
b. Full-cost method. All drilling costs are capitalized; therefore, $4,000,000 appears
on the balance sheet as oil and gas properties.
10-28
SOLUTIONS TO PROBLEMS
P10-1
Adjusting entries at December 31, 2013, to correct the books. All original entries must be reversed
out of the Land and Buildings account and recorded in the correct accounts.
1. Land ................................................................................................... 26,500

Land and Buildings ................................................................... 26,500
To record purchase, demolition of old building, and legal
fees in separate Land account.
2. Building .............................................................................................. 2,900

To record interest on loan for construction.
3. Building .............................................................................................. 53,000

To record cost of construction in separate Building account.
4. Land ................................................................................................... 1,200

To record sewer assessment.
5. Land (or Land Improvements*) ..................................................... 3,500

To record cost of landscaping.
*If the landscaping has a limited life, the cost should be recorded in the Land
Improvements account.
6. Equipment ......................................................................................... 18,800

To record excavation equipment purchase.
7. Building .............................................................................................. 15,000

To record fixed overhead incurred during construction of
building (alternatively, this item could be charged to regular
production through Work in Process).
8. Building .............................................................................................. 1,000

To record cost of insurance during construction.
9. Profit (Gain) on Construction ........................................................ 12,000

To reverse profit improperly recognized.
10-29
P10-1 (concluded)
10. Loss Due to Worker’s Injury ............................................................. 3,000

To expense cost to compensate construction worker.
11. Loss Due to Modifications to Building .......................................... 7,500

To expense avoidable costs required by inspectors due to
planning error.
12. Land ................................................................................................... 2,500

To record delinquent property tax expense on land.
P10-2
1. Investment in Land .......................................................................... 74,000

Cash ............................................................................................ 74,000
2. Land ................................................................................................... 50,000a

Buildings ............................................................................................. 150,000b
Common Stock, $3 par ............................................................ 60,000
Additional Paid-in Capital on Common Stock ................... 140,000
a($60,000 ÷ $240,000) × $200,000
b($180,000 ÷ $240,000) × $200,000
3. Equipment ......................................................................................... 153,000*

Repair and Maintenance Expense .............................................. 2,000
Cash ............................................................................................ 155,000
*$120,000 + $7,000 + $10,000 + $16,000
4. Land Improvements ........................................................................ 30,000

Cash ............................................................................................ 30,000
5. Land ................................................................................................... 60,000a

Buildings ............................................................................................. 78,000b
Investment in Land ................................................................... 37,000
Cash ............................................................................................ 101,000
a$37,000 + (26,000 – $3,000)
b$60,000 + $18,000 (imputed interest is ignored)
6. Leasehold Improvements .............................................................. 20,000

Cash ............................................................................................ 20,000
7. Equipment ......................................................................................... 32,000

Cash ............................................................................................ 32,000
Royalty Expense ............................................................................... 12,000
Cash ............................................................................................ 12,000
10-30
P10-3
1. Stock exchanged: 1,000 shares at $24/share = $24,000

Land ................................................................................................... 24,000
Common Stock, $10 par.......................................................... 10,000
Additional Paid-in Capital on Common Stock ................... 14,000
2. A charge (debit) to Accumulated Depreciation is the best method for this replacement
since a separate value for the old engine is not known.
Cash (or Accounts Payable) .................................................. 1,000
3. Land is acquired:
Land ................................................................................................... 60,000
Preferred Stock, $50 par .......................................................... 25,000
Additional Paid-in Capital on Preferred Stock .................... 35,000
The value of $55,000 may be the most conservative, but the value of $60,000 is a more
faithful representation of the fair value of the property and has the advantage of greater
verifiability. The value at which the stock was traded 2 months ago is out of date or
“stale” market value and is not a faithful representation of the fair value of the land at
the date of the exchange.
4. The present value of the 2-year non-interest-bearing note, using the 10% imputed interest
rate, is: $10,000 × 0.826446 (factor from Table 3 of TVM Module) = $8,264
Machine ............................................................................................ 8,264
Notes Payable ........................................................................... 10,000
P10-4 [AICPA Adapted]
1. TOWNSAND COMPANY
Analysis of Land Account
For 2013
Balance at January 1, 2013 ............................... $ 100,000
Land site number 621:
Acquisition cost .......................................... $1,000,000
Commission to real estate agent ........... 60,000
Clearing costs ............................................. $15,000
Less: Amounts recovered ......................... (5,000) 10,000
Total land site number 621 ....................... 1,070,000
Land site number 622:
Land value .................................................. $ 200,000
Building value ............................................. 100,000
Demolition cost .......................................... 30,000
Total land site number 622 ....................... 330,000
Balance at December 31, 2013 ........................ $1,500,000
10-31
P10-4 (concluded)
TOWNSAND COMPANY
Analysis of Buildings Account
For 2013
Balance at January 1, 2013 .................................................... $800,000
Cost of new building constructed on land site
number 622:
Construction costs .......................................................... $150,000
Excavation fees............................................................... 11,000
Architectural design fees .............................................. 8,000
Building permit fee ......................................................... 1,000 170,000
Balance at December 31, 2013 ............................................. $970,000
TOWNSAND COMPANY
Analysis of Leasehold Improvements Account
For 2013
Balance at January 1, 2013 ........................................................................... $500,000
Electrical work .................................................................................................. 35,000
Construction of extension to current work area ( $80,000 × ½) .............. 40,000
Office space ..................................................................................................... 65,000
Balance at December 31, 2013 .................................................................... $640,000
TOWNSAND COMPANY
Analysis of Machinery and Equipment Account
For 2013
Balance at January 1, 2013 .................................................... $700,000
Cost of new machines acquired:
Invoice price .................................................................... $75,000
Freight costs ..................................................................... 2,000
Unloading charges ......................................................... 1,500 78,500
Balance at December 31, 2013 ............................................. $778,500
2. Items in the fact situation which were not used to determine the answer to Requirement
1 above, and where, or if, these items should be included in Townsand’s financial
statements are as follows:
a. Land site number 623, which was acquired for $600,000, should be included on
Townsand’s balance sheet as land held for resale (an investment).
b. Painting of ceilings for $10,000 should be included as a normal operating expense
on Townsand’s income statement.
c. Royalty payments of $13,000 should be included as a normal operating expense
on Townsand’s income statement.
10-32
P10-5
1. Machine (new) ......................................................................... 10,000

Accumulated Depreciation: Machine ................................ 28,000a
Loss on Exchange ..................................................................... 4,000b
Machine (old) ..................................................................... 40,000
Cash ..................................................................................... 2,000
aAccumulated depreciation = Original cost – Book value
= $40,000 – $12,000
= ($10,000 – $2,000) – $12,000
2. Building ....................................................................................... 55,000

Land...................................................................................... 35,000
Cash ..................................................................................... 5,000
Gain on Exchange ............................................................ 15,000*
*Gain = Fair value of asset surrendered – Book value of asset surrendered
= ($55,000 – $5,000) – $35,000
3. Machine (new) ......................................................................... 20,000

Accumulated Depreciation: Machine ................................ 2,000a
Machine (old) ..................................................................... 13,000
Cash ..................................................................................... 5,000
Gain on Exchange ............................................................ 4,000b
aAccumulated depreciation = Original cost – Book value
= $13,000 – $11,000
= ($20,000 – $5,000) – $11,000
4. Equipment (Car) ....................................................................... 15,800a

Accumulated Depreciation: Truck ....................................... 5,000
Cash ............................................................................................ 1,000
Equipment (Truck) .............................................................. 20,000
Gain on Exchange ............................................................ 1,800b
= $16,800 – $1,000
= $16,800 – $15,000
10-33
P10-6
1. a. Machine (new) ......................................................................... 34,000a

Accumulated Depreciation: Machine ................................ 15,000b
Machine (old) ............................................................. 40,000
Cash .............................................................................. 4,000
Gain on Exchange ..................................................... 5,000c
= $30,000 + $4,000
bAccumulated depreciation = Original cost – Book value
= $40,000 – $25,000
cGain =Fair value of asset surrendered – Book value of asset surrendered
= $30,000 – $25,000
b. Machine (new) ......................................................................... 34,000a

Loss on Exchange .................................................................... 3,000c
Machine (old) ............................................................. 40,000
Cash .............................................................................. 4,000
= $30,000 + $4,000
= $40,000 – $33,000
cLoss = Fair value of asset surrendered – Book value of asset surrendered
= $30,000 – $33,000
c. Machine (new) ......................................................................... 27,000a

Cash............................................................................................ 5,000
Machine (old) ............................................................. 45,000
= $32,000 – $5,000
= $45,000 – $20,000
cGain = Fair value of asset surrendered – Book value of asset surrendered
= $32,000 – $20,000
10-34
P10-6 (continued)
d. Machine (new) ......................................................................... 27,000a

Cash............................................................................................ 5,000
Machine (old) ............................................................. 45,000
= $32,000 – $5,000
= $45,000 – $36,000
= $32,000 – $36,000
e. Machine (new) ......................................................................... 90,000a

Machine (old) ............................................................. 150,000
= $90,000
= $150,000 – $80,000
cGain = Fair value of asset surrendered – Book value of asset surrendered
= $90,000 – $80,000
f. Machine (new) ......................................................................... 90,000a

Machine (old) ............................................................. 150,000
= $90,000
= $150,000 – $94,000
= $90,000 – $94,000
g. Building ....................................................................................... 200,000a

Land .............................................................................. 130,000
= $200,000
= $200,000 – $130,000
10-35
P10-6 (concluded)
h. Building ....................................................................................... 230,000a

Cash .............................................................................. 30,000
Land .............................................................................. 130,000
= $200,000 + $30,000
= $200,000 – $130,000
i. Building ....................................................................................... 180,000a

Cash............................................................................................ 20,000
Land .............................................................................. 130,000
= $200,000 – $20,000
= $200,000 – $130,000
2. For requirement (e), the lack of commercial substance requires that the gain be
deferred. Therefore, the journal entry would be:
Machine (new) .................................................................. 80,000*
Accumulated Depreciation: Machine ......................... 70,000
Machine (old) .............................................................. 150,000
*Gain =Fair value of asset surrendered – Book value of asset surrendered
= $90,000 – $80,000
Cost = Fair value of asset surrendered – Gain
= $90,000 –$10,000
3. The different accounting is justified because when an exchange has commercial

substance, the economic position of the two companies has changed and the
company’s future cash flows are expected to significantly change as a result of the
exchange. Therefore, any gains and losses are recognized at the time of the exchange.
However, when the exchange lacks commercial substance, the two companies are in
the same economic position. Therefore, while conservatism allows losses to be
recognized, a company will defer any gains until a transaction which alters the
company’s cash flows occurs.
10-36
P10-7 [CMA Adapted]
1. Raw materials:
Iron castings ............................................................................... $61,040
Other raw materials .................................................................. 50,200 $111,240
Direct labor:
Layout (90 × $5.00) .................................................................... $ 450
Electricians [(380 – 80) × $9.00] ............................................... 2,700
Machinery [(1,100 – 200) × $8.00] .......................................... 7,200
Heat treatment (100 × $7.50) .................................................. 750
Assembly [(450 – 100) × $7.00] ................................................ 2,450
Testing [(180 – 20) × $8.00] ....................................................... 1,280
Additional testing labor [(180 – 20) × $5.00) ........................ 800 15,630
Factory overhead:
Layout and electricians ($3,150 × 0.70) ................................ $ 2,205
Machining, heat treatment, assembly, testing
($12,480 × 1.00) ................................................................... 12,480 14,685
Interest paid ...................................................................................... 4,260
Total amount to be capitalized .................................................... $145,815
2. Alternate procedures are possible for two costs—rework costs (affects direct labor,
repairs and maintenance, and factory overhead) and factory overhead.
a. Rework costs should be treated as a cost of the period when they are abnormal.
Rework costs arising from errors that ought not to have occurred should be
treated as losses of the period. Apparently, this was the case in this situation
because the damage resulted from a type of error that was not expected.
Consequently, rework costs and related repairs and maintenance expenses
($1,340) were not capitalized in Requirement 1.
Rework costs can be capitalized when they are considered normal and can be
explained by errors resulting from the uncertainties associated with the new
machine design. When this occurs, rework and repairs and maintenance are
necessary to make the machine operational.
b. There are two alternate ways to allocate overhead costs to self-constructed

assets. The method followed in Requirement 1 was to assign a portion of all
overhead costs to the self-constructed asset. The reasoning justifying this
treatment is that all productive output should absorb its proportionate share of all
factory overhead costs. In addition, this method results in a cost of the
constructed asset that tends to more closely approximate the cost of the
equivalent purchased asset.
A second method is to capitalize the incremental overhead (variable and
traceable fixed overhead) that increases as a result of the construction. (Note,
however, there was no traceable fixed overhead in this problem). This approach
includes the additional costs incurred to produce the fixed asset as part of the
cost of the asset. Because variable and traceable fixed overheads are incurred
to build the asset and will benefit future periods, these costs should be
capitalized. Nontraceable fixed overhead costs would have been incurred in any
case so that there is no causal relationship between the fixed overhead costs
and the self-constructed asset; therefore, these overhead costs would not be
capitalized.
10-37
P10-8
1. Weighted average accumulated expenditures for 2013 are calculated as:

Jan. 1 $ 540,000 × 12/12 = $ 540,000
May 1 465,000 × 8/12 = 310,000
Oct. 1 600,000 × 3/12 = 150,000
$1,605,000 $1,000,000

$1,000,000 × 12% = $120,000

$ 1,500,000 × 12% = $ 180,000
$ 6,000,000 × 14% = 840,000
$14,000,000 × 8% = 1,120,000
$2,140,000
capitalized.
Weighted average accumulated expenditures for 2014 are calculated as:

Jan. 1 $1,725,000* × 6/12 = $ 862,500
Mar. 1 1,500,000 × 4/12 = 500,000
June 30 600,000 × 0/12 = 0
$1,362,500
*$1,605,000 expenditures + $120,000 capitalized interest from 2013.

$1,362,500 × 12% = $163,500

$ 1,500,000 × 12% = $ 180,000
$ 6,000,000 × 14% = 840,000
$14,000,000 × 8% = 1,120,000
$2,140,000
capitalized.
10-38
P10-8 (concluded)
2. Total costs = Expenditures + Capitalized interest

= ($1,605,000 + $2,100,000) + ($120,000 + $163,500)
= $3,988,500
Cost Estimated residual value
Straight-line depreciation =
Estimated service life
$3,998,500 $0
=
20
= $199,925 in 2013
= $199,925 × 1/2* = $99,962.50 in 2014
*Note: 1/2 year of depreciation is taken because the asset was not placed into service
until July 1.
3. The interest capitalization has the following effects on the financial statements:
Income Statement
2013: Interest expense decreased by $120,000. Net income increased by $120,000.
2014: Interest expense decreased by $163,500. Net income increased by $163,500.
In addition, the capitalization of interest increases the amount of depreciation expense
recognized in 2014 relative to what would be recognized if interest had not been
capitalized.
Balance Sheet
December 31, 2013: Asset (construction in progress) increased by $120,000.
Retained earnings increased by $120,000.
December 31, 2014: Asset (construction in progress) increased by $163,500
for a total of $283,500. Retained earnings increased by
$163,500, for a total of $283,500. Accumulated depreciation would
be increased by a half year of depreciation in 2014, from the
interest capitalization in 2013 and 2014. Retained earnings would
be decreased by 2014 depreciation expense on the interest
capitalization.
Statement of Cash Flows

If the company is producing the asset for its own use, the cash paid for the interest that is
capitalized is included in cash outflows for investing activities instead of cash flows from
operating activities. There would be no effect if the company was producing the asset
for sale to others. In addition, the capitalization of interest would increase the
depreciation adjustment in the operating section of the statement of cash flows under
the direct method (see Chapter 21 for additional details).
10-39
P10-9
Supporting computations
Construction costs, (excluding capitalized interest):
2013: $ 6,000,000
2014: $11,460,000
2015: $ 1,800,000
Average costs = [(Beginning cumulative costs + Ending cumulative costs) ÷ 2]
2013
Average costs = $3,000,000 [($0 + $6,000,000) ÷ 2]
Capitalized interest = $3,000,000 × 12% × 9/12a

= $270,000
aBecause activities were suspended for 3 months, interest is only capitalized for 9 months.
2014
Average costs = [($6,000,000 + $270,000) + ($6,270,000 + $11,460,000)] ÷ 2
= $12,000,000
Capitalized interest = ($10,000,000 × 12%) + ($2,000,000 × 8.5%b)
= $1,370,000
( $20,000,000 ) + ( $60,000,000 )
b
× 10% × 8%
$80,000,000 $80,000,000
2015
Average costs = [($6,270,000 + $11,460,000 + $1,370,000) + ($19,100,000 + $1,800,000)] ÷ 2
= $20,000,000
Capitalized interest = [($10,000,000 × 12%) + ($10,000,000 × 8.5%)] × 3/12c

= $512,500
cBecause the project is completed on March 31, 2015, interest for three months is capitalized.
Interest revenue, 2013 = ($10,000,000 – $3,000,000) × 11%

= $770,000
Interest expense, 2013 = ($20,000,000 × 10%) + ($60,000,000 × 8%) +

($10,000,000 × 12%) – $270,000
= $2,000,000 + $4,800,000 + $1,200,000 – $270,000
= $7,730,000
2014 = $2,000,000 + $4,800,000 + $1,200,000 – $1,370,000
= $6,630,000
2015 = $2,000,000 + $4,800,000 + $1,200,000 – $512,500
= $7,487,500
10-40
P10-9 (concluded)
1. Journal entries, 2013:

Construction in Progress ................................................................. 6,000,000
Cash ............................................................................................ 6,000,000
Cash [($10M – $3M) × 0.11] ............................................................ 770,000
Interest Revenue ....................................................................... 770,000
Interest Expense ............................................................................... 7,730,000
Construction in Progress ................................................................. 270,000
Cash [($10M × 0.12) + ($20M × 0.10) + ($60M × 0.08)]........ 8,000,000
Journal entries, 2014:

Cash ............................................................................................ 11,460,000
Cash ............................................................................................ 8,000,000
Journal entries, 2015:

Cash ............................................................................................ 1,800,000
Construction in Progress ................................................................. 512,500
Cash ............................................................................................ 8,000,000
Building .............................................................................................. 21,412,500*
Construction in Progress .......................................................... 21,412,500
*$6,000,000 + $270,000 + $11,460,000 + $1,370,000 + $1,800,000 + $512,500
2. Under IFRS, the total interest costs of loans obtained specifically for the purpose of
constructing a qualifying asset are eligible for interest capitalization. Therefore, the total
interest expense of construction-related borrowing of $1,200,000 ($10,000,000 × 12%) is
eligible for interest capitalization. In addition, interest revenue from the temporary
investment of amounts borrowed specifically for construction is offset against interest
costs eligible for capitalization. Therefore, Foothills would capitalize $430,000 ($1,200,000 –
$770,000).
P10-10
1. 2013
Jan. 10 Accumulated Depreciation: Machinery ................ 2,400
Cash (or Accounts Payable).............................. 2,400
Replacement of motor.
Feb. 14 Repair and Maintenance Expense.......................... 700

Cash (or Accounts Payable).............................. 700
Repairs to machine.
10-41
P10-10 (concluded)
Mar. 10 Repair and Maintenance Expense.......................... 2,000

Repairs due to accident.
19 Machine ........................................................................ 900
Cash (or Accounts Payable).............................. 900
Replacement of motor.
27 Furniture and Fixtures .................................................. 700
Office Expenses ........................................................... 500
Office rearrangement and painting.
2. Under IFRS, the cost of reorganizing PP&E is expensed. Therefore, the journal entry on
March 27 would be:
Mar. 27 Office Expenses ........................................................... 1,200
Office rearrangement.
P10-11
1. a. Successful-efforts method: The cost of dry wells, $3,000,000 (50% × $6 million), is

expensed in 2013. The cost of successful wells, $3,000,000 (50% × $6 million), is
capitalized in 2013 and expensed over the life of the wells.
On the income statement for 2014, depletion is reported at $300,000 (10% × $3
million). [Depletion is discussed in more detail in Chapter 11]
On the 2014 ending balance sheet, the asset is reported at a net value of
$2,700,000 (the $3,000,000 cost less the $300,000 depletion).
b. Full-cost method: The total cost of $6 million is capitalized in 2013.

On the income statement for 2014, depletion is reported at $600,000 (10% × $6
million). [Depletion is discussed in more detail in Chapter 11]
On the 2014 ending balance sheet, the asset is reported at a net value of
$5,400,000 (the $6 million cost less the $600,000 depletion).
2. Small oil companies generally prefer the full-cost method because it results in higher
asset values on the balance sheet and delays the recognition of expenses on the
income statement.
10-42
ANSWERS TO CASES
C10-1 [AICPA Adapted]
1. The expenditures that are capitalized when equipment is acquired for cash include the
invoice price of the equipment (net of discounts) plus all expenditures relating to its
purchase or preparation for use, such as insurance during transit, freight, duties,
ownership search, ownership registration, installation, and breaking-in costs. Any
available discounts, whether taken or not, should be deducted from the cost of the
equipment.
2. a. When the market value of the equipment is not determinable by reference to a

similar cash purchase, the cost of equipment purchased with bonds having an
established market price is the market value of the bonds.
b. When the market value of the equipment is not determinable by reference to a
similar cash purchase, and the common stock used in the exchange does not
have an established market price the cost of equipment is the equipment’s
estimated fair value if that is more clearly evident than the fair value of the
common stock. Independent appraisals may be used to determine the fair values
of the assets involved.
c. When the market value of equipment acquired is not determinable by reference
to a similar cash purchase, the cost of equipment purchased by exchanging
similar equipment having a determinable market value is the market value of the
equipment given up.
3. The factors that determine whether expenditures relating to property, plant, and
equipment already in use are capitalized relate to whether the expenditures increase
the future economic benefits of the asset. These future economic benefits can be
increased by:
• Extending the useful life of the property, plant, and equipment
• Improving the productivity of the property, plant, and equipment
• Increasing the quality of the product produced
Expenditures are capitalized when they benefit future periods. The cost to acquire the land is
capitalized and classified as land, a nondepreciable asset. Because tearing down the small
factory is readying the land for its intended use, its cost is part of the cost of the land and is
capitalized and classified as land. As a result, this cost is not depreciated as it would be if it was
classified as part of the cost of the building.
Because the rock blasting and removal is required for the specific purpose of erecting the
building, its cost is capitalized as part of the cost of the building. This cost is depreciated over the
estimated useful life of the building.
10-43
C10-2 (concluded)
The road is a land improvement, and its cost is capitalized and classified separately as a land
improvement. This cost is depreciated over its estimated useful life.
The added four stories is an addition, and its cost is capitalized as part of the cost of the building.
This cost is depreciated over the remaining life of the original office building because that life is
shorter than the estimated useful life of the addition.
1. The acquisition cost includes all expenditures necessary to obtain the benefits of the
asset. Specifically, any expenditure necessary to obtain the asset and put it in operating
condition is capitalized. Such cost may include delivery and installation. The acquisition
cost represents the cash equivalent price and accordingly would not include interest
charges.
2. Normal maintenance performed on the new machine should not be capitalized as part
of the machine’s cost. It should be expensed as incurred if the machine is not used in the
manufacturing process or should be inventoried as part of factory overhead if the
machine is used in the manufacturing process. Normal maintenance does not enhance
the service potential of the machine.
3. The wing added to the manufacturing building should be capitalized. The addition
should be depreciated over its estimated useful life or the remaining useful life of the
building of which it is an integral part, whichever is shorter. The addition should be
included in the property, plant, and equipment section of the balance sheet.
4. The leasehold improvements made to the office space should be capitalized. The
leasehold improvements should be depreciated (amortized) over their estimated useful
lives or the term of the lease, whichever is shorter. The unamortized portion of the
leasehold improvements could be included as a separate caption in the property, plant,
and equipment section or the intangible assets section of the balance sheet. The
amortized portion of the leasehold improvements would be shown as an expense on the
income statement.
1. The following costs, if applicable, should be capitalized as a cost of land:

a. Contract price (or negotiated purchase price)
b. Brokers’ commission
c. Legal fees
d. Title fees
e. Recording fees
f. Escrow fees
g. Surveying fees
h. Existing unpaid taxes, interest, or liens assumed by the buyer
i. Clearing, grading, landscaping, and subdividing
j. Cost of removing old building (less salvage)
k. Special assessments such as lighting or sewers if they are permanent in nature
10-44
C10-4 (concluded)
2. A plant asset acquired on a deferred-payment plan should be recorded at its fair value
or the fair value of the liability at the date of the transaction. To measure fair value, the
present value of the deferred payments, discounted at the stated or imputed interest
rate, can be used. Note that this measurement excludes interest from the cost of the
asset. The interest portion (stated or imputed) of the contract price should be charged to
interest expense over the life of the contract.
3. In general, plant assets received in exchange for other nonmonetary assets should be
measured at the fair value of the asset surrendered or the fair value of the asset
received, whichever is more clearly evident. When a small amount of cash is also
exchanged, the plant asset should be recorded at the fair value of the asset surrendered
plus (minus) cash paid (received). A gain or loss will be recognized as the difference
between the fair value and book value of the asset surrendered.
1. Capital expenditures increase the future economic benefits of an asset above those that
were originally expected. Operating (revenue) expenditures maintain the existing
economic benefits.
2. a. The purchase price of the land should be capitalized. The land should be shown
as a noncurrent asset on the balance sheet at its original cost and it is not subject
to depreciation.
b. The cost of constructing the factory should be capitalized and depreciated over
the expected life of the factory. This cost, net of accumulated depreciation,
should be shown as a noncurrent asset on the balance sheet.
c. The cost of grading and paving the parking lot (a land improvement) should be
capitalized and depreciated over the expected life of either the factory or
parking lot, whichever is shorter. The land improvement expenditures, net of
accumulated depreciation, should be shown as a noncurrent asset on the
balance sheet.
d. The cost of maintaining the factory once production has begun is a “revenue
type” expenditure.
C10-6
1. There is no doubt that the first 2,000 acres qualifies for interest capitalization because it
meets the various criteria of GAAP. It meets the criteria of a qualifying asset and the
three criteria for the start of the capitalization period—expenditures have been made,
activities are in progress, and interest cost is being incurred.
The remaining 3,000 acres of the initial 5,000 acres also qualify for interest capitalization.
GAAP specifies that the term “activities” is to be construed broadly and should include
more than physical construction. Since the 5,000 acres were acquired for a single
development, “activities” are in progress on the entire 5,000 acres.
10-45
Another random document with
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Fred is not a doctor yet."
"Then we may keep him till he is a doctor. Is that what you

mean?"
"If you wish it. Of course, we would pay all his fees, or
whatever expenses there are; but we could not bear to
think that you, who have been so good to him—the truth is,
Lucy, we have talked this over several times, and we cannot
get further than this: he must stay in England to finish his
studies."
"That will be another year. When that year is over, Alick will
not be sorry to leave Edgestone. I will speak to him, and I
hope he will go out with Fred and settle in Gattigo."
"But you?" Janet said softly.
"I shall be at rest, my dear. It cannot last another year. Fred

has made all the brightness poor Alick has had in his life
since our boy died and my long illness began. It is only right
that Fred should go out to you, but it would be hard on Alick
to be left alone. I shall be happy about him now."
"I am sure of one thing—Dr. Wentworth will be Fred's first

thought," said Janet, earnestly. "And I am glad to know
your wishes. My husband cannot be absent from Gattigo
much longer, but this makes it possible to arrange matters."
"Tell me, Janet—I know you wrote to that dreadful woman,

Mr. Rayburn's stepmother—have you had an answer?"
"No; but I hope she will write. Poor, unhappy woman!"
"I hardly think she will. She must feel like a murderer."
"She never intended to drive the children to such an act—
they were so young that they did not understand. I think I
hear them at the door. Yes, here they all come, my poor Lily
looking so happy! The cousins at the Ferry Farm will be
jealous."
After this, it was an understood thing that Fred was to live

with the Wentworths until he had completed his medical
studies. His father and mother were obliged to return to
Canada, and the time they had fixed on drew near.
"Fred," said Janet to her husband, "I want you to leave

Edgestone one day before we need go to Liverpool, for—I
want to go to Hemsborough."
"Why, Janet?"
"I want to see Mrs. Rayburn. She has not answered my

letter, but I am sure she is very unhappy—though, indeed, I
tried to be gentle with her. Do you remember, in that first
letter—the one that told us that she had seen our boy—she
seemed to long sore to be forgiven?"
"Janet—how can we forgive her? You ask too much—I'm

only a man."
"Have we no need of forgiveness? And remember 'forgive

us, as we forgive.' Oh, dear Fred, you would not make that
prayer mean 'do not forgive, for I will not'?"
There was no resisting that argument. In a few days,

farewell was said to the Wentworths, and also to the little
grave, where now a marble cross bore Francis Rayburn's
true and full name, and after the date and notice of his age,
the words "Love is strong as death." Fred went with them,
intending to see them off, and then go to London to
continue his studies.
They went to Hemsborough, and walked from the railway
station to the Thompsons' house. They knocked and
inquired if Mrs. Rayburn were at home. The servant said—
"Mrs. Rayburn is not at all well. She keeps her room, and
sees nobody, ma'am."
"Please ask if she will see me," said Janet. "I am her
daughter-in-law."
The girl ran upstairs, and in a minute or so a lady came

down to speak to them. Janet recognized her as one of the
Thompson nieces of whom Mrs. Rayburn used to talk so
much.
"Mrs. Rayburn, my aunt is too ill to see any one but you,"
she began; "Mr. Rayburn must excuse her. Indeed, I have
had great work to persuade her to see you; she is in such a
state of nerves. She is very ill, and has been worse ever
since she had a letter from you."
Anna Thompson was looking curiously at the two young

people all this time. Janet turned to her husband.
"Will you go back to the station, Fred, or will you wait

here?"
"Come in and wait in the parlour. My mother is there," said

Miss Thompson. So they went to the parlour, while she took
Janet upstairs.
"My aunt is a very secret woman," she said. "We know she
has something on her mind, but she never talks of it. This is
her room."
She led Janet in, and, going over to the window, took up
some work that lay there, and sat down.
Mrs. Rayburn lay watching Janet with a strange gleam in
her eyes, but she did not speak. Janet went up to the bed.
"Don't you know me, Mrs. Rayburn?"
"I know you. Is Anna there? Anna, go away—I must see

Janet alone. Don't be angry, Anna—you're very kind, but I
must see Janet alone."
"Oh, certainly," said Miss Thompson, tossing her head. "I

just thought you might be faint, you know; but I'm sure I
don't want to stay."
And she left the room with her nose in the air.
"Janet, you are changed. You have a sad face now. You
never can forgive me?"
"I do forgive you, Mrs. Rayburn. I am sure you have

suffered dreadfully, and been very sorry—and we forgive
you, as we hope to be forgiven."
"Fred—Fred forgives me?"
"Yes; he is here—will you see him? Will you see my boy, and
Lily?"
"No, no. Ah! They may forgive, but I can never forgive
myself. I dare not even pray to be forgiven. Why, Janet, I
murdered your Frank just as surely as I thought all these
years that I might have murdered both. Oh, when I saw
Fred, and felt sure that it was Fred, I never doubted but
what Frank was safe too! My heart got so light, I began to
feel like myself again. Then came your letter, and though
you wrote kindly, every word pierced me through. I don't
know but that I am worse, now I know for certain that
Frank is dead, than I was when I could sometimes hope
that both had escaped."
"Mrs. Rayburn, I have but a little time to stay with you, for
our passages are taken, and we must get on to Liverpool
to-day. But do listen to me, and don't be angry with me for
speaking plainly. Whether one or both of my boys lived or
died makes no difference at all in your share in the
children's flight. You never meant to harm them, I know.
You would not willingly have injured them. So, though they
had perished in the Kelmer, or died in any way, you are no
murderer. Your nerves are shaken, and you think the whole
over and over till you cannot really see it. What you really
have to repent of is, you promised to be kind to the boys,
and you were not. They were used to kindness, and were
more frightened, I suppose, than other children might have
been."
"Janet, I cannot take any comfort till I have told you just
what happened. No one else can tell you."
She sat up and began what proved to be a long story, but

Janet listened patiently, even to the first part, which
concerned her life at the old Gatehouse. When she came to
the story of the children, their mother had no need of
patience. She listened with quiet tears to the history of
Frank's constant care for the little one, and the occurrences
of the last day at Kelmersdale quite accounted for the
children's flight.
"And now, Janet, can you say again that I did not murder
Frank?"
Janet dried her eyes, and, looking gently at the poor

woman, she said—
"I can. You did not intend to injure them in any way. For
what you did, that made them unhappy and drove them
away from you, we forgive you with all our hearts. Mrs.
Rayburn, I must go; but promise me one thing. I am sure
there must be some clergyman here in whom you could
have confidence. Send for him, be as candid with him as
you have been with me; and though we shall hardly meet
again on earth, we shall meet at the right hand of the Judge
—both of us forgiven sinners, for His sake."
"I will—I promise you. Oh, Janet! How good you are to me!
Since you can forgive me, surely I may hope."
"He who taught us to forgive will not be unforgiving."
Janet bent and kissed her, and then went quickly to the
door, for she felt that her stay was longer than had been
intended. As she opened the door, she saw Miss Anna in full
flight down the passage, and could not help suspecting that
she had been listening.
It was not nice of Miss Anna to listen at the door, yet,

strange to say, what she thus heard made a great change in
her.
"There must be some truth in this talk about religion," she

thought. "I expected poor Janet would shake her in the bed,
and instead she forgave her, and seemed quite anxious
about her, and spoke so kindly."
And thus the leaven was hid in the meal, and gradually the
whole was leavened.
The Rayburns had lost the train by which they had meant to
go on to Liverpool, but they were in time for the boat in
which their passage was taken. The parting with Fred was a
trial, but it was, they hoped, only for a time.
And, now that Janet has found both her boys, we may bid
her farewell.
PRINTED BY WILLIAM CLOWES AND SONS, LIMITED,
LONDON AND BECCLES.

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Intermediate Accounting Reporting and Analysis 1St Edition Wahlen Solutions Manual Full Chapter PDF

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Intermediate Accounting Reporting and Analysis 1St Edition Wahlen Solutions Manual Full Chapter PDF

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Intermediate Accounting Reporting and

Analysis 1st Edition Wahlen Solutions

Property, Plant, and Equipment: Acquisition and Subsequent Investments

CONTENT ANALYSIS OF END-OF-CHAPTER ASSIGNMENTS

Equipment sheet inclusion

Construction interest can be capitalized

RE10-9 Interest During Computation of capitalized 4 Moderate 10 Analytic Measurement Application

E10-15 Self-Construction Determination of amount to 4 Moderate 10 Analytic Measurement Analysis

E10-18 Calculating Compute amount of 4 Moderate 15 Analytic Measurement Analysis

Accounting methods; determination of

P10-10 Events Subsequent to Replacement, repairs, 5 Moderate 25 Analytic Measurement Analysis

C10-7 Capitalization of Accounting for purchase 2 Moderate 20 Analytic Measurement Analysis

Q10-18 The distinction between a capital expenditure and an operating expenditure is

ANSWERS TO MULTIPLE CHOICE

SOLUTIONS TO REVIEW EXERCISES

Cost of land: $55,000 + $2,000 + $7,500 = $64,500

Cost of building: $250,000 + $3,500 + $125,000 = $378,500

Appraisal Relative Total Allocated

Amount to be paid off each year: $350,000 ÷ 7 = $50,000

$50,000 × 4.868419 = $243,421 (rounded)

Land ................................................................................................... 400,000

Cost of asset acquired = Fair value of asset surrendered – Cash received

Weighted average interest rate:

$3,000,000 × 12% = $360,000

Portion of Weighted Average

Capitalized interest = Weighted average accumulated expenditures x Interest rate

$1,000,000 × 10% = $100,000

Alternative 1: Reduce accumulated depreciation

Alternative 2: Increase the asset account

1. The following are included in property, plant, and equipment:

2. a. Idle equipment awaiting sale is not being used in operations. It is normally

1. The following are included in the cost:

The following are not included in the cost:

Machine ............................................................................................ 213,000*

E10-5 [AICPA Adapted]

Cash equivalent price .................................................................... $9,500

Machine ............................................................................................ 9,800

E10-6 [AICPA Adapted]

1. Acquisition cost .................................................................. $200,000

Cost assigned to:

Next, the increase in value from $104,000 to $106,000 is recorded as follows:

1. Land ..................................................................................... 65,000

3. The different accounting is justified because when an exchange has commercial

Building (Warehouse (new)).......................................................... 33,000a

E10-14 [AICPA Adapted]

2. Allocating a portion of overhead to the cost of the self-constructed asset is a full-costing

1. Weighted average accumulated expenditures are calculated as:

Avoidable interest is calculated as:

Actual interest is calculated as:

1. Weighted average accumulated expenditures are calculated as:

Avoidable interest is calculated as:

Actual interest is calculated as:

1. Weighted average accumulated expenditures are calculated as:

Avoidable interest is calculated as:

Actual interest is calculated as:

1. The following are recorded as capital expenditures:

1. April 9 Air Conditioning System (New) .............................................. 83,000

1. a. Successful-efforts method. 40% of drilling is unsuccessful. Therefore:

40% × $4,000,000 = $1,600,000 is expensed

b. Full-cost method. All costs are capitalized, so no drilling expense is recognized.

a. Successful-efforts method. 60% of drilling efforts are successful. Therefore:

1. Land ................................................................................................... 26,500