Stice 18e Ch10 SOL Final

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CHAPTER 10
QUESTIONS
1. a. The cost of land includes the original
purchase price; brokers commissions;
legal fees; title, recording, and escrow
fees; surveying costs; local government
special assessment taxes; cost of
clearing or grading; and other costs
that permanently improve the land or
prepare it for use. Expenditures for land
improvements that have a limited life,
such as paving, fencing, and landscaping, may be separately summarized as
land improvements and depreciated
over their estimated useful lives.
b. The cost of buildings includes the original purchase price, brokers commissions, legal fees, title and escrow fees,
reconditioning costs, alteration and improvement costs, and any other costs
that improve the buildings and hence
benefit future periods.
c. The cost of equipment includes the
original purchase price, taxes and duties on purchases, freight charges, insurance while in transit, installation
charges and other costs in preparing
the asset for use, subsequent improvements or additions, and any other
expenditures that will improve the
equipment and thus benefit more than
one period.
2. a. A copyright, when purchased, is recorded at its purchase price. When internally developed, all costs of legally
establishing the copyright are included
as costs of the copyright.
b. The cost of purchasing a franchise and
all other sums paid specifically for a
franchise including legal fees are considered the franchise cost. Property
improvements required under the franchise also are recorded as part of the
franchise cost.
c. The cost of a trademark includes all
expenditures required to establish the
trademark, such as filing and registration fees, as well as legal expenses for
the defense of the trademark. Pur-
3.
4.
5.
6.
381
chased trademarks are recorded at the

purchase price.
Accountants frequently are required to allocate costs among two or more accounts.
The principal method of allocation is based
on relative fair values of the individual assets, if they can be determined. A ratio of
each individual assets fair value to the sum
of the fair values for all assets involved in
the purchase is used to determine cost for
each individual asset. If fair values, or
some approximation of fair values, cannot
be obtained for all assets in the basket purchase, allocation can be made to those assets where fair values are available, and
any remaining balance can be allocated, on
some systematic basis, to remaining assets.
When equipment is purchased on a deferred payment contract, care must be
taken to exclude the stated or implicit interest from the purchase price. The asset
should be recorded at its equivalent cash
price. Interest on the unpaid contract balance should be recognized as interest expense over the life of the contract.
a. Sales practice for some products consistently inflates the list price that is initially assigned. Because most buyers
are aware of this practice, considerable
negotiations take place between buyers
and sellers before a market price is established. If accountants use the list
price without careful evaluation, values
could be inflated.
b. The goal of accounting for the acquisition of property and equipment is to record the acquisition at the equivalent
cash price or the closest approximation
to cash that can be obtained. This is
especially important when trade-ins are
involved.
a. In constructing a new building for its
own use, Gaylen Corp. will charge the
building with all costs incurred in connection with the construction activities.
These costs will include building costs
in the form of direct labor, direct mate-
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382
Chapter 10
rials, factory overhead, and any other

expenditures that can be identified with
the construction of the asset.
b. When a company constructs its own assets, there are two positions that may be
taken in assigning general overhead to
the cost of the asset: (1) Overhead may
be assigned to special construction just
as it is assigned to normal activities on
the grounds that both activities benefit
from the overhead; this would mean that
construction would be charged with the
increase in overhead arising from construction activities as well as a pro rata
share of the companys fixed overhead.
(2) Only the increase in overhead may
be charged to construction on the
grounds that management decides to
construct its own assets after giving due
consideration to the differential or additional costs involved. An equitable allocation of the fixed overhead between
regular operations and construction affords no special favor to construction activities; on the other hand, a charge to
construction for only the increase in total
overhead grants no special concessions
to regular activities during the construction period.
7. Before interest charges are capitalized, a
construction project should be a discrete
project. Interest should not be capitalized
for inventories manufactured or produced
on a repetitive basis, for assets that are
currently being used, or for assets that are
idle and not undergoing activities to prepare them for use.
understated. Furthermore, subsequent

income will be overstated through the
failure to recognize depreciation, and
this misstatement will be accompanied
by misrepresentations of earnings-toassets and earnings-to-owners-equity
relationships reflected on the financial
statements. Properties unconditionally
transferred should be recognized by
debits to asset accounts and a credit to
a revenue account in terms of the fair
market values of the properties acquired, and depreciation should be recognized in using such properties.
b. If the donation of the property is contingent upon certain conditions, the presidents position relative to the nonrecognition of the asset is proper until the
time the conditions are met. Until the
conditions are met, the fair value of the
conditional gift, along with a description
of the conditions, should be disclosed
in the notes to the financial statements.
10. Under IAS 41, biological assets, such as
cattle, fruit trees, and lumber forests, are
recorded in the balance sheet at their fair
value (less estimated selling costs) as of
the balance sheet date. Increases in this
fair value are recognized as gains, and decreases are recognized as losses.
11. An asset retirement obligation is a legal
obligation a company has to restore the site
of a piece of property or equipment when
the asset is retired. The estimated fair
value of the asset retirement obligation is
recognized as a liability and is added to the
cost of the asset when it is acquired.
8. Under IAS 23, a company capitalizes the

net amount of interest which is the gross
amount of interest, computed as under U.S.
GAAP, less the amount of investment income generated by borrowed construction
funds that are temporarily invested before
they are needed to pay for construction expenditures. Accordingly, the amount of interest capitalized under the international
standard is generally less than the amount
that would be capitalized under the U.S.
standard.
12. Many companies establish a minimum

monetary amount for recording expenditures as assets, even though the item purchased meets the definition of an asset.
The principal reasons for this are materiality and the cost involved in recording an
asset and depreciating it over its estimated
life. It is more expedient to expense these
smaller capital expenditures immediately,
thus avoiding the recordkeeping associated
with assets.
9. a. If the donation of the property by the

philanthropist is unconditional, the
presidents position cannot be defended. If the donation is not recognized, both assets and income will be
13. a. The cost of a depreciable asset incorrectly recorded as an expense will understate assets and owners equity for
the current year and for succeeding
years, but by successively decreasing
amounts until the asset no longer
Chapter 10
makes a contribution to periodic revenue. Net income will be understated in

the first year by the excess of the expenditure over depreciation for the current period; net income in succeeding
years will be overstated by the amount
of depreciation charges applicable to
the asset that should be charged off as
expense.
b. An expense expenditure incorrectly
recorded as an addition to the cost of a
depreciable asset will overstate assets
14.
383
and owners equity for the first year and

for succeeding years, but by successively decreasing amounts until the
charge has been fully written off. Net
income will be overstated for the first
year by the difference between the recognized depreciation for the current period and the amount of the expenditure;
net income for succeeding years will be
understated by the depreciation charges
recognized in such periods.
Expenditure
Classification
Cost of installing machinery..........................................
Asset
Cost of unsuccessful litigation to protect patent...........
Expense
Extensive repairs as a result of a fire ...........................
Expense
Cost of grading land .....................................................
Asset
Insurance on machinery in transit ................................
Asset
Interest incurred during construction period ................. Asset (if interest added to construction
cost)
Expense (if interest charged to expense)
g. Cost of replacing a major machinery component.........
Asset
h. New safety guards on machinery .................................
Asset
i. Commission on purchase of real estate .......................
Asset
j. Special tax assessment for street improvements.........
Asset
k. Cost of repainting offices ..............................................
Expense
a.
b.
c.
d.
e.
f.
15. The remaining net book value of a component that is replaced is added to depreciation expense for the period.
16. a. Research activities are those used to
discover new knowledge that will be
useful in developing new products, services, or processes, or significantly improve an existing product or process.
Development activities seek to apply
research findings to develop a plan or
design for new or improved products
and processes. Development activities
include the formulation, design, and
testing of products, construction of prototypes, and operation of pilot plants.
b. Research and development costs are
generally expensed in the period incurred. An exception is when the expenditure is for equipment and facilities
that have alternate future uses beyond
the specific current research project.
This exception permits the deferral of
costs incurred for materials, equipment,
facilities, and intangibles purchased,
but only if the alternative future use can
be specifically identified. In addition,
software development costs are capi-
talized if they are incurred after technological feasibility has been established.
17. With the full cost method of accounting for
oil and gas exploration costs, the cost of
drilling dry holes is capitalized and amortized. With the successful efforts method,
only the exploratory costs associated with
successful wells are capitalized; the cost of
dry holes is expensed as incurred.
18. In general, the cost of internally generated
intangibles is expensed as incurred.
19. The five general categories of intangible
assets are as follows:
1. Marketing related.
2. Customer related.
3. Artistic related.
4. Contract based.
5. Technology based.
20. The two approaches used in estimating fair
values using present value computations
are the traditional approach and the expected cash flow approach. In the traditional approach, which is often used in
situations in which the amount and timing
of the future cash flows is determined by
contract, the present value is computed
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Chapter 10
using a risk-adjusted interest rate that incorporates expectations about the uncertainty of receipt of the future contractual
cash flows.
In the expected cash flow approach, a
range of possible outcomes is identified,
the present value of the cash flows in each
possible outcome is computed (using the
risk-free interest rate), and a weightedaverage present value is computed by
summing the present value of the cash
flows in each outcome, multiplied by the estimated probability of that outcome.
21. a. Goodwill may be reported properly as
an asset only when it is purchased or
otherwise established by a transaction
between independent parties.
b. Expenditures for advertising should not
be capitalized as goodwill. Some advertising expenditures may be deferred
if the costs applicable to future benefits
from such advertising can be determined objectively. Normally, however, it
is advisable to expense such expenditures because of the short-lived nature
of the benefits and because future
benefits may be difficult to estimate.
22. The fair value of acquired in-process research and development is recognized as
an asset when acquired as part of a business combination but as an expense when
acquired as a basket purchase outside a
business combination.
23. Recording noncurrent operating assets at
their current values represents a trade-off
between relevance and reliability. In the
United States, reliability concerns have resulted in the prohibition of asset write-ups. In
many countries around the world, accountants have learned to rely on the judgment of
professional appraisers who estimate the
current value of long-term assets.
24. Under the provisions of IAS 16, the credit

entry is to a revaluation equity account when
noncurrent operating assets are written up
to reflect an increase in market value. (The
important point is that the revaluation
amount is not to be reported as a gain in the
income statement.)
25. Under the provisions of IAS 40, a company
can elect to use a fair value approach in
which the investment property is reported in
the balance sheet at its fair value, and any
resulting gains or losses are reported in the
income statement.
26. The fixed asset turnover ratio is computed
as sales divided by average property, plant,
and equipment (fixed assets); it is interpreted as the number of dollars in sales
generated by each dollar of fixed assets.
27. As with all ratios, the fixed asset turnover
ratio must be used carefully to ensure that
erroneous conclusions are not made. For
example, fixed asset turnover ratio values
for two companies in different industries
cannot be meaningfully compared. Another
difficulty in comparing values for the fixed
asset turnover ratio among different companies is that the reported amount for property,
plant, and equipment can be a poor indicator
of the actual fair value of the fixed assets
being used by a company. Another complication with the fixed asset turnover ratio is
caused by leasing. Many companies lease
the bulk of their fixed assets in such a way
that the assets are not included in the balance sheet. This practice biases the fixed
asset turnover ratio for these companies
upward because the sales generated by the
leased assets are included in the numerator
of the ratio but the leased assets generating
the sales are not included in the denominator.
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385
PRACTICE EXERCISES
PRACTICE 101 CATEGORIES OF TANGIBLE NONCURRENT OPERATING ASSETS
1.
2.
3.
4.
Land
Cost to purchase land .....................................................
Cost to purchase land .....................................................
Cost to prepare land for use ...........................................
Total...................................................................................
$ 85,000
50,000
10,000
$145,000
Buildings
Cost to construct building ..............................................
$132,000
Equipment
Cost to purchase equipment...........................................
Cost to ship and install equipment ................................
Cost of testing ..................................................................
Total...................................................................................
$ 30,000
1,000
1,750
$ 32,750
Land Improvements
Cost to construct parking lot and sidewalks ................
$ 10,000
PRACTICE 102
Equipment
Building
Land
Total
BASKET PURCHASE
$250,000
425,000
125,000
$800,000
(250,000/800,000) $750,000
(425,000/800,000) $750,000
(125,000/800,000) $750,000
Allocated
Cost
$234,375
398,438
117,187
$750,000
(Note: Some rounding is necessary to ensure that the total allocated cost is
$750,000.)
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Chapter 10
PRACTICE 103
1.
DEFERRED PAYMENT
Equipment................................................................................
Discount on Notes Payable....................................................
Cash....................................................................................
Notes Payable ....................................................................
120,696
49,304
10,000
160,000
Business calculator keystrokes:

N = 8 years
I = 9%
PMT = $20,000
FV = 0 (There is no balloon payment associated with the note.)
PV = $110,696
2.
Notes Payable..........................................................................
Cash....................................................................................
20,000
Interest Expense .....................................................................

Discount on Notes Payable ..............................................
9,963
20,000
9,963
Interest expense: ($160,000 $49,304) 0.09 = $9,963

PRACTICE 104
EXCHANGE OF NONMONETARY ASSETS
Equipment ........................................................................................
Gain on Asset Exchange ........................................................
Land..........................................................................................
PRACTICE 105
97,300
62,300
35,000
COST OF A SELF-CONSTRUCTED ASSET
Cost of materials............................................................................................
Labor cost ......................................................................................................
Allocated overhead cost ($8,000,000/$4,000,000) $600,000 ...................
Interest cost ...................................................................................................
Total.........................................................................................................
$ 400,000
600,000
1,200,000
140,000
$2,340,000
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387
PRACTICE 106
CAPITALIZED INTEREST: SINGLE-YEAR COMPUTATION
January 1
May 1
November 1
Total
Amount
$100,000
200,000
300,000
$600,000
Applicable
Interest
Rate
10%
13
13
1.
Amount of capitalized interest = $33,833
2.
Cost of building = $600,000 + $33,833 = $633,833
PRACTICE 107
Months of
Avoidable
Interest
12/12
8/12
2/12
Capitalized
Interest
$10,000
17,333
6,500
$33,833
CAPITALIZED INTEREST: JOURNAL ENTRY
Building ............................................................................................
Interest Expense ($270,000 $33,833) ..........................................
Cash..........................................................................................
33,833
236,167
270,000
Total interest: ($100,000 0.10) + ($2,000,000 0.13) = $270,000

PRACTICE 108
CAPITALIZED INTEREST: MULTIPLE-YEAR COMPUTATION
From Year 1
July 1
Total
Amount
$ 100,000
533,833
500,000
$1,133,833
Applicable
Interest
Rate
10%
13
13
Months of
Avoidable
Interest
12/12
12/12
6/12
1.
Amount of capitalized interest = $111,898
2.
Cost of building = $1,133,833 + $111,898 = $1,245,731
PRACTICE 109
Capitalized
Interest
$ 10,000
69,398
32,500
$111,898
ACQUISITION BY DONATION
Land ..................................................................................................
Revenue (or Gain) ...................................................................
111,000
111,000
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Chapter 10
PRACTICE 1010
ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION
Mining Site........................................................................................
Cash..........................................................................................
800,000
Mining Site........................................................................................
Asset Retirement Obligation..................................................
72,489
800,000
72,489
Business Calculator Keystrokes:

FV = $200,000; I = 7%; N = 15 years $72,489
PRACTICE 1011
RENEWALS AND REPLACEMENTS
Heating/Cooling System .................................................................

Accumulated DepreciationBuildings (old system)...................
Depreciation Expense .....................................................................
Buildings (old system)............................................................
Cash..........................................................................................
PRACTICE 1012
(1)
(2)
(3)
160,000
210,000
RESEARCH AND DEVELOPMENT
Normal: Expense all$120,000 + $100,000 = $220,000

Software: Expense amounts before technological feasibility: $120,000
International: Expense amounts before technological feasibility: $120,000
PRACTICE 1013
(1)
(2)
210,000
128,000
32,000
OIL AND GAS EXPLORATION COSTS
Successful efforts: Expense all costs of dry holes = $400,000.

Full cost: Capitalize all costs, and amortize the amount to expense in subsequent years. Accordingly, expense for this year is $0. (Note: Because all costs
were incurred on the last day of the year, there is no amortization this year.)
PRACTICE 1014
ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY
Cash price ..................................................................................

Fair value of net assets ($1,360,000 $500,000) ....................
Goodwill......................................................................................
Cash ..................................................................................................
Accounts Receivable ......................................................................
Inventory...........................................................................................
Patent................................................................................................
Property, Plant, and Equipment .....................................................
Goodwill............................................................................................
Liabilities..................................................................................
Cash..........................................................................................
$1,400,000
860,000
$ 540,000
20,000
190,000
320,000
80,000
750,000
540,000
500,000
1,400,000
Chapter 10
PRACTICE 1015
389
ACCOUNTING FOR A BARGAIN PURCHASE
Cash price ..................................................................................

Market value of net assets ($1,360,000 $500,000) ...............
Bargain purchase amount ........................................................
Cash ..................................................................................................
Accounts Receivable ......................................................................
Inventory...........................................................................................
Patent................................................................................................
Property, Plant, and Equipment .....................................................
Gain ..........................................................................................
Liabilities..................................................................................
Cash..........................................................................................
PRACTICE 1016
$ 720,000
860,000
$(140,000)
20,000
190,000
320,000
80,000
750,000
140,000
500,000
720,000
INTANGIBLES AND A BASKET PURCHASE
Building .........................
Operating permit...........
In-process R&D.............
Order backlog ...............
Estimated
Fair Values
$200,000
100,000
150,000
120,000
$570,000
Cost Allocation
Cost
According to
Assigned to
Relative Estimated Values Individual Items
200,000/570,000 $500,000
$175,439
100,000/570,000 $500,000
87,719
150,000/570,000 $500,000
131,579
120,000/570,000 $500,000
105,263
$500,000
Building ............................................................................................
Operating Permit..............................................................................
R&D Expense*..................................................................................
Order Backlog ..................................................................................
Cash..........................................................................................
175,439
87,719
131,579
105,263
500,000
*The acquired in-process R&D is recognized as an expense because it has been acquired in a basket purchase outside a business combination.
PRACTICE 1017
INTANGIBLES AND A BUSINESS ACQUISITION
Cash ..................................................................................................
Inventory...........................................................................................
In-Process R&D Asset.....................................................................
Goodwill............................................................................................
Liabilities..................................................................................
Cash..........................................................................................
100,000
50,000
500,000
450,000
300,000
800,000
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PRACTICE 1018
Chapter 10
FIXED ASSET TURNOVER RATIO
Fixed asset turnover ratio = Sales/Average net property, plant, and equipment
= $480,000/[($160,000 + $200,000)/2]
= 2.67
PRACTICE 1019
DANGER IN USING FIXED ASSET TURNOVER RATIO
Company B
= $360,000/[($200,000 + $220,000)/2]
= 1.71
Company Ausing historical cost of fixed assets
= $480,000/[($160,000 + $200,000)/2]
= 2.67
Company Ausing market value of fixed assets
= $480,000/[($290,000 + $310,000)/2]
= 1.60
Company A is more efficient (i.e., has a higher fixed asset turnover ratio) if one uses
historical cost of fixed assets (2.67 compared to 1.71). However, Company Bs fixed
assets are younger and are therefore reported at amounts close to their market
values. If we assume that the reported amounts of Company Bs fixed asset are a fair
approximation of their market values, then it appears that Company B is more efficient than is Company A (1.71 compared to 1.60).
Chapter 10
391
EXERCISES
1020.
During the construction period, the expenditures will be charged as

follows:
Land
Purchase of land ...................................... $282,000

Land survey ..............................................
4,800
Fees for search of title for land...............
500
Building permit .........................................
Temporary quarters for construction
crews .......................................................
Payment to tenants of old building for
vacating premises ..................................
4,450
Razing old building ..................................
41,000
Excavating basement...............................
Special assessment tax for street
project .....................................................
2,400
Costs of construction ..............................
Cost of paving parking lot adjoining
building ...................................................
Cost of shrubs, trees, and other
landscaping ............................................
Total ....................................................... $335,150
Land
Improvements
Building
4,000
11,200
13,000
2,395,000
$55,000
36,000
$91,000
$2,423,200
Dividends, $4,000, should be closed to Retained Earnings. Damages

awarded for injuries sustained in construction, $8,750, are charged to a
loss account.
1021.
Patents....................................................................................... 19,100*
Cash .....................................................................................
*$13,400 legal expenses + $2,500 drawings + $3,200 fees = $19,100
Research and Development Expense..................................... 50,800*
Machinery .................................................................................. 33,800
Cash (or other credits) .......................................................
19,100
84,600
*$34,000 lab expenses + $16,800 wages (40% of $42,000) = $50,800
$6,000 metal + $2,600 blueprints + $25,200 wages (60% of $42,000) = $33,800

Patents.......................................................................................
Cash .....................................................................................
To record cost of defending patent.
19,300
19,300
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Chapter 10
1022.
Property
Land..........................
Buildings..................
Equipment................
Total.......................
Appraised
Value
$ 250,000
600,000
200,000
$1,050,000
Cost
Cost Allocation
Assigned to
According to
Individual
Appraised Values
Assets
(250,000/1,050,000) $920,000 = $ 219,048
525,714
(600,000/1,050,000) $920,000 =
(200,000/1,050,000) $920,000 =
175,238
$ 920,000
1023. Land [($600,000 2/3) $600,000] .............................

Building ........................................................................
Patent............................................................................
Franchise......................................................................
Cash ........................................................................
To record purchase of assets for $1,450,000,
allocated on the basis of fair market value
of individual assets.
300,000
600,000
337,000
213,000*
1,450,000
*Franchise: $1,450,000 $1,237,000 (sum of patent,

building, and land) = $213,000
1024.
2013
July
2014
June 30
Equipment ............................................................
Discount on Notes Payable ................................
Notes Payable ................................................
Cash ................................................................
96,000
26,420
Notes Payable ......................................................

Cash ................................................................
11,242
Interest Expense..................................................
Discount on Notes Payable ..........................
*5.193% ($112,420 $26,420) = $4,466
2015
June 30
Notes Payable ......................................................

Cash ................................................................
Interest Expense..................................................
Discount on Notes Payable ..........................
*5.193% ($101,178 $21,954) = $4,114
112,420
10,000
11,242
4,466*
4,466
11,242
11,242
4,114*
4,114
Chapter 10
1025.
393
Value of the equipment considering interest at 9%

PV of $8,600 for 10 years at 9%
PVn = R(PVAF 10 9% )
= $8,600(6.4177)= $55,192 (rounded)
or with a business calculator:
PMT = $8,600; N = 10; I = 9% PV = $55,192
$86,000 $55,192 = $30,808
Correcting entry:
1026.
Discount on Notes Payable.............................................

Equipment...................................................................
30,808
Trademarks.......................................................................
Land ($732,000 0.20) .....................................................
Buildings...........................................................................
Franchise ..........................................................................
Common Stock ...........................................................
Paid-ln Capital in Excess of Par................................
183,000
146,400
585,600
145,000*
30,808
20,000
1,040,000
*Market value of stock .....................................................$1,060,000

Amount assigned on basis of known market
values:
Trademarks .............................
$183,000
Land .........................................
146,400
Buildings .................................
585,600
915,000
Value assigned to franchise..
$ 145,000
1027.
Buildings ............................................................................
Premium on Bonds Payable ($350,000 0.06) ..........
Bonds Payable .............................................................
Common Stock.............................................................
Paid-ln Capital in Excess of Par .................................
*$680,000 (cost of building) $371,000 (market value of
bonds) = $309,000 (value assigned to common stock);
$309,000 $90,000 (par value) = $219,000 paid-in capital
in excess of par.
680,000
21,000
350,000
90,000
219,000*
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Chapter 10
1028.
Land................................................................................
Common Stock (50,000 $0.50) ..............................
Paid-ln Capital in Excess of Par ..............................
Cash ...........................................................................
*Market value of stock: 50,000 shares $15 ..........
Cash paid:
Purchase price (partial) ...........
$80,000
Legal cost .................................
10,000
Property taxprevious year ...
30,000
Building demolition .. $21,000
Less: Salvage ............
6,000
15,000
Total ..........................................................................
1029.
Cost to construct special equipment:

Direct material..........................................................
Direct labor...............................................................
Variable overhead ($200,000 1.40) ......................
Fixed overhead ($700,000 0.35) ...........................
Total costs exclusive of interest ......................
Interest charges capitalized ...................................
Total cost of self-constructed equipment .......
885,000*
25,000
725,000
135,000
$ 750,000
135,000
$ 885,000
$ 320,000
200,000
280,000
245,000
$1,045,000
25,000*
$1,070,000
*Interest charge: $1,045,000 10% 3/12 year = $26,125

Limited to amount of interest paid: $500,000 10% 6/12 = $25,000
1030. (1)
Computation of the amount of interest to be capitalized for 2013 is as

follows:
Interest
Fraction
Capitalization of the Year Capitalized
Expenditure Date
Amount
Rate
Outstanding
Interest
January 2, 2013 ................. $500,000
10.0%
12/12
$50,000
May 1, 2013 ........................
450,000
10.0
8/12
30,000
November 1, 2013 .............
550,000
10.0
2/12
9,167
150,000
12.4*
2/12
3,100
Total capitalized interest for 2013 ............................................................. $92,267
*Weighted-average interest rate on general bond liabilities:
Bond Issue
10-year
5-year
Principal
$ 500,000
800,000
$1,300,000
Rate
13.0%
12.0
12.4
Interest
Cost
$ 65,000
96,000
$ 161,000
Weighted-average rate = $161,000 $1,300,000 = 12.4% (rounded)
Chapter 10
395
1030. (Concluded)
(2)
Computation of the amount of interest to be capitalized for 2014 is as

follows:
Interest
Fraction
Capitalization of the Year
Expenditure Date
Amount
Rate
Outstanding
Accumulated in 2013 ........ $ 1,500,000
10.0%
12/12
242,267
12.4
12/12
March 1, 2014 ....................
950,000
12.4
10/12
September 1, 2014 ............
800,000
12.4
4/12
November 30, 2014 ...........
600,000
12.4
1/12
Total capitalized interest for 2014 .......................................................
Capitalized
Interest
$ 150,000
30,041
98,167
33,067
6,200
$ 317,475
Interest capitalized in 2014 is restricted to the total interest incurred of $311,000*

because this amount is less than the indicated amount to be capitalized of
$317,475.
*($1,500,000 x 0.10) + ($500,000 x 0.13) + ($800,000 x 0.12) = $311,000
1031. (a)
(b)
(c)
(d)
(e)
(f)
(g)
NC. The construction does not cover an extended period of time.

C.
NC. The construction costs are not separately accumulated.
NC. The construction costs are not substantial.
NC. The equipment is produced on a repetitive basis.
NC. The building is in use throughout the construction.
NC. The land is idle.
1032.
Initial Acquisition
Detoxification Facility..................................
Cash.........................................................
Asset Retirement Obligation .................
900,000
900,000
335,945
335,945

FV = $1,300,000; I = 7%; N = 20 years $335,945
After 1 Year
Asset Retirement Obligation .................
FV = $100,000; I = 7%; N = 19 years $27,651
27,651
27,651
396
1033.
Chapter 10
(a)
(b)
1034.
Wall ....................................................................................
Accumulated DepreciationBuildings (old wall) .........
Depreciation Expense......................................................
Buildings (old wall).....................................................
Cash.............................................................................
84,000
18,000
42,000
Filters.................................................................................
Accumulated Depreciation (old filters) ..........................
Depreciation Expense......................................................
Filters (old filters) .......................................................
Cash.............................................................................
20,000
2,750
8,250
60,000
84,000
11,000
20,000
1. All $325,000 should be charged to research and development expenses.

Only expenditures for equipment that can be used on other projects can
be deferred. No such alternative uses are identified in the problem.
2. Materials and equipment, exclusive of equipment useful
on other projects ............................................
$ 80,000
Personnel............................................................
105,000
Indirect costs......................................................
60,000
Equipment depreciation ($80,000 5)* ............
16,000
Total..................................................................
$261,000
*The equipments useful life on other projects would be the basis for
the cost allocation to research and development expense for 2013.
1035. 1. (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
2. (a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
E
C
E
E
E
E
I
I
E
C
E
C
C
C
I
I
Chapter 10
1036.
1037.
397
1. Successful efforts method:

Exploration expense......................................................
Capitalized exploration cost .........................................
2. Full cost method:
Exploration expense......................................................
Capitalized exploration cost .........................................
$18.4 million
$5.6 million
0
$24 million
(a) Record painting of partitions as an asset. Original painting is considered an asset expenditure. Repainting is an expense.
(b) Normally record cost of tearing down the wall as a loss. The old wall will
not benefit future periods. Some accountants justify capitalization because all incremental costs to construct extension should be considered cost of extension.
(c) Separate asset accounts should be maintained for the machine and the
motor because they have substantially different useful lives. When the
old motor is replaced, any remaining book value should be added to
depreciation expense for the year. The cost of the new motor is recorded in a separate asset account.
(d) Record the cost of grading land as an asset. It is a proper addition to
land.
(e) Record the assessment for street paving as an asset. It is a proper addition to land.
(f) Record cost of tearing down the previously occupied old building in
preparation for a new one as an expense. Expense relates to the old
building, not to new construction. As in (b), some accountants justify
capitalization because cost of tearing down is necessary for new construction.
1038.
1. Cash ...............................................................................
12,000
Receivables ...................................................................
96,000
Inventory ........................................................................
145,000
Land, Buildings, and Equipment .................................
519,000
Goodwill .........................................................................
354,000*
Current Liabilities....................................................
75,000
Long-Term Debt.......................................................
116,000
Cash..........................................................................
935,000
*Balance of purchase price not allocated to identifiable assets.
398
Chapter 10
1038. (Concluded)
1039.
2. Cash ................................................................................
Receivables ....................................................................
Inventory .........................................................................
Land, Buildings, and Equipment ..................................
Current Liabilities.....................................................
Long-Term Debt........................................................
Cash...........................................................................
Gain............................................................................
12,000
96,000
145,000
519,000
1. Accounts Receivable.....................................................
Inventory .........................................................................
Prepaid Insurance..........................................................
Buildings and Equipment (net).....................................
Goodwill ..........................................................................
Accounts Payable ....................................................
Cash...........................................................................
200,000
260,000
12,000
168,000
140,000
2. Accounts Receivable.....................................................
Inventory .........................................................................
Prepaid Insurance..........................................................
Buildings and Equipment (net).....................................
Gain............................................................................
Accounts Payable ....................................................
Cash...........................................................................
200,000
260,000
12,000
168,000
75,000
116,000
445,000
136,000
130,000
650,000
190,000
130,000
320,000
1040.
Internet domain name ..

Order backlog ...............
In-process R&D.............
Operating permit...........
Estimated
Fair Values
$150,000
100,000
200,000
80,000
$530,000
Cost Allocation
Cost
According to
Assigned to
Relative Estimated Values Individual Items
150,000/530,000 $500,000
$141,509
100,000/530,000 $500,000
94,340
200,000/530,000 $500,000
188,679
80,000/530,000 $500,000
75,472
$500,000
Internet Domain Name ...................................................

Order Backlog .................................................................
R&D Expense*.................................................................
Operating Permit.............................................................
Cash ...........................................................................
141,509
94,340
188,679
75,472
500,000
Advertising Expense ......................................................
Cash ...........................................................................
300,000
300,000
Chapter 10
399
1041.
1. Accounts Receivable..........................................
Inventory ..............................................................
Equipment............................................................
Goodwill ...............................................................
Short-Term Loan Payable.............................
Cash................................................................
180,000
75,000
84,000
626,000
160,000
805,000
The government contacts intangible is not separately recognized

because it is not contract based nor is it separately tradable. The
$92,000 fair value estimated for this intangible is imbedded in the
reported amount of goodwill.
2. Accounts Receivable..........................................
Inventory ..............................................................
Equipment............................................................
Gain.................................................................
Short-Term Loan Payable.............................
Cash................................................................
180,000
75,000
84,000
2013
$150,000
500,000
260,000
$910,000
2012
$125,000
450,000
250,000
$825,000
154,700
160,000
24,300
1042.
Land ....................................................
Buildings ............................................
Equipment ..........................................
Total fixed assets...............................
Fixed asset turnover ratio = Sales/Average fixed assets

$3,500,000/[($825,000 + $910,000)/2] = 4.03
400
Chapter 10
PROBLEMS
1043.
1.
Cost of machinery:
Raw materials ................................................................
Labor...............................................................................
Installation .....................................................................
Factory overhead ..........................................................
Materials spoiled in trial runs ......................................
Machinery balance ........................................................
*Raw materials: $83,400 $4,500 discount = $78,900
Machine tools balance ......................................................
2.
$ 78,900*
55,000
13,600
22,700
3,100
$173,300
$ 15,200
Correcting Entries
(a) Loss on Sale of Machinery ......................................................... 4,860*
Machinery (Job Order No. 1329) ............................................
4,860
*Loss: $18,760 cost of dismantling old machine $13,900 proceeds = $4,860
(b) Purchase Discounts ....................................................................
To report cash discounts as a reduction in
machine cost.
4,500
(c) Machinery (Job Order No. 1329) ................................................

Factory Overhead....................................................................
To report excess overhead as cost of machine.
22,700
(d) Profit on Construction of Machinery .........................................

To cancel profit on self-construction; savings
were improperly recognized as profit.
22,500
(e) Machine Tools .............................................................................

To report machine tools separately.
15,200
4,500
22,700
22,500
15,200
1044.
The solution to this problem is adapted from Qs & As: Technical Hotline, Journal of
Accountancy, February 1989, p. 31.
(a) and (b)
CNCapitalize and dont depreciate.

Costs of changing the land itself should be viewed as permanent improvements to the land and are not depreciable. These costs include
clearing away unwanted trees and shrubs, shaping the land for the tees
and greens, building sand traps, and constructing artificial lakes.
Chapter 10
401
1044. (Concluded)
(c) and (d)
CDCapitalize and depreciate.

If the lives of the plants can be reasonably estimated, the cost of the
plants should be depreciated over those lives. However, if no reasonable estimates exist, the cost should be capitalized but not depreciated.
(e) and (f)
CDCapitalize and depreciate.

Land improvements that wear out over time should be capitalized and
depreciated.
(g)
EExpense.
The $50 cost of rakes is immaterial in relation to the other golf course
expenditures. The costs of estimating the life of the rakes and maintaining a rake account in the financial records would far exceed the value of
the theoretical improvement in the records. The best approach is to expense the cost of the rakes.
(h) and (i)
CNCapitalize and dont depreciate.

All costs of getting the land ready for its intended use should be included as part of the land cost.
1045.
1. Cost of land:
Purchase price ......................................................................................... $ 140,000
Delinquent property taxes .....................................................................
22,000
Title search and insurance .....................................................................
7,000
City improvements .................................................................................
19,500
Cost of destroying buildings, net of salvage used in new building ...
19,000
Total cost of land................................................................................... $ 207,500
Cost of land improvements:
Landscaping ............................................................................................. $ 81,600
Sidewalks and parking lot .......................................................................
41,000
Total cost of land improvements ......................................................... $ 122,600
2. Cost of building:
Building permit......................................................................................... $
6,000
Salvage material from old building ........................................................
5,000
Contract cost ............................................................................................ 1,800,000
Total cost of buildings .......................................................................... $1,811,000
Fire insurance premium on building is charged to expense.
402
Chapter 10
1046.
2013:
Mar. 1 Land ($800,000 0.25) .....................................................
Buildings ($800,000 0.75) .............................................
Property Tax Expense* ....................................................
Cash ..............................................................................
Mortgage Payable ........................................................
*Alternatively, this could be debited to Prepaid
Property Taxes and adjusted at June 30.
200,000
600,000
29,700
369,700
460,000
30 Buildings...........................................................................
Cash ..............................................................................
(Note: Repairs are capitalized because they were
necessary at acquisition.)
34,200
May 15 Cash ..................................................................................

Buildings.......................................................................
6,600
15 Buildings...........................................................................
Cash ..............................................................................
101,300
15 Loss on Building Modification to Comply with Safety

Code Requirements ......................................................
Cash ..............................................................................
34,200
6,600
101,300
12,400
12,400
June 1 Patent ................................................................................

Machinery .........................................................................
Common Stock.............................................................
Paid-ln Capital in Excess of Par .................................
33,000
31,000
July 1 Franchise ..........................................................................

Machinery .........................................................................
Discount on Bonds Payable ...........................................
Cash ..............................................................................
Bonds Payable .............................................................
50,000
61,000
4,000
Nov. 20 Land Improvements .........................................................

Cash ..............................................................................
50,900
Dec. 31 Redecorating and Repairs Expense...............................

Cash ..............................................................................
6,400
4,000
60,000
15,000
100,000
50,900
6,400
Chapter 10
403
1047.
Organization Expenses ........................................................................
Land, Buildings, and Equipment..................................................
To record costs identified with the establishment
of company. These organization costs should be
expensed as incurred.
*Organization fees paid to state.......
$ 21,000
Corporate organization costs .........
40,000
Stock promotion bonus ...................
150,000
$211,000
211,000*
Land .......................................................................................................
*Land site and old building...............
$325,000
Title clearance fees ..........................
15,300
Cost of razing old building ..............
15,000
$355,300
355,300
Miscellaneous Revenue .......................................................................

Land ................................................................................................
To reduce the cost of the land by proceeds
from the sale of scrap.
7,000
Executive Salaries Expense ................................................................

To record executive salaries in expense account.
100,000
Patent.....................................................................................................
To reclassify patent cost to separate account.
54,000
Property Tax Expense ........................................................................

To reclassify county real estate tax.
13,200
Buildings ...............................................................................................
To reclassify building cost to separate account.
211,000
355,300*
7,000
100,000
54,000
13,200
1,450,000
1,450,000
404
Chapter 10
1048.
(a) Retained Earnings ........................................................................ 120,000
Patents.......................................................................................
120,000
To correct error debiting research and development costs of patents to patents in prior period.
(b) Patents ...........................................................................................
Retained Earnings ....................................................................
To correct error debiting legal fees in
connection with the issuance of patents to
expenses in prior period.
14,280
(c) Patents ...........................................................................................

Deferred Costs ..........................................................................
To debit patents with the legal costs in
connection with the successful settlement of
an infringement suit.
15,000
(d) Patents ...........................................................................................

Liability for Settlement of Patent Infringement Suit..............
Accrued Attorneys Fees .........................................................
To record the settlement costs and the
additional legal fees in connection with the
successful settlement of an infringement suit.
24,260
14,280
15,000
23,000
1,260
Chapter 10
405
1049.
1.
2013
Jan. 2
15
Apr. 1
May
July 1
Dec. 31
Organization Expenses ..................................................

23,300
Cash ...........................................................................
23,300
To record organization cost of legal fees and
stock certificate costs.
(Note: As mentioned in the text, the AICPA has determined that organization costs should be expensed as incurred.)
Advertising Expense ......................................................
Cash ...........................................................................
To record costs to hire clown and for
pamphlets and candy for promotional purposes.
1,500
Patents.............................................................................
Cash ...........................................................................
To record application and legal fees for patents.
49,250
1,500
49,250
Licenses ..........................................................................
20,000*
Trademarks ($30,000 $20,000)....................................
10,000
Common Stock..........................................................
To record container license and trademark.
*600 $50 = $30,000 cost of both intangibles
Relative value, license to total cost: 2/3 $30,000 = $20,000
Buildings .........................................................................
Cash ...........................................................................
To record cost of building to be used in future
R&D projects.
131,000
Research and Development Expense...........................

Cash ...........................................................................
To record salaries of personnel involved in
R&D activities.
175,000
2. Intangible assets:
Patents ..................................................................................
Licenses ................................................................................
Trademarks ...........................................................................
30,000
131,000
175,000
$49,250
20,000
10,000
$79,250
406
Chapter 10
1050.
Cost.....................................................
Escrow fee..........................................
Property taxes....................................
Real estate commission....................
Remodeling and repairs....................
(1)
2013
July 1
Land
$ 132,000 (20%)
2,400
2,000
8,000
$ 144,400
Building
$528,000 (80%)
9,600
8,000
32,000
58,200
$635,800
Land Improvements........................................................
Land .................................................................................
Building ...........................................................................
Discount on Notes Payable ...........................................
Cash ($811,200 $344,098).........................................
Notes Payable ..............................................................
*Discount on notes payable:
Total
$ 660,000
12,000
10,000
40,000
58,200
$ 780,200
31,000
144,400
635,800
255,902*
467,102
600,000
PVn = R(PVAF n i )
PV
= $30,000(Table IV 20 6% )
= $30,000(11.4699)
= $344,097

PMT = $30,000; N = 20; I = 6% PV = $344,098
Face value ..........................................
Less: Present value ...........................
Discount on note ...............................
(2)
2013
Dec. 31
2014
June 30
$600,000
344,098
$255,902
Notes Payable .................................................................

Cash ..............................................................................
30,000
Interest Expense .............................................................

Discount on Notes Payable ........................................
*Interest Expense: $344,098 0.06 = $20,646
Principal reduction: $30,000 $20,646 = $9,354
20,646*
Notes Payable .................................................................

Cash ..............................................................................
30,000
30,000
20,646
Interest Expense .............................................................

20,085*
Discount on Notes Payable ........................................
*$344,098 $9,354 = $334,744; $334,744 0.06 = $20,085
30,000
20,085
Chapter 10
407
1051.
Powersoft Company
Income Statement
For the Year Ended December 31, 2013
Sales ..............................................................................................
$675,000
Cost of goods sold:
Beginning inventory ...............................................................
$ 155,000
Software production costs.....................................................
49,800
Amortization of capitalized software costs..........................
32,150
Goods available for sale.........................................................
$ 236,950
Ending inventory.....................................................................
94,780
142,170*
Gross profit ...................................................................................
$532,830
Expenses:
Salaries and wages of programmers ....................................
$ 265,000
Expenses related to research period...................................
82,200
Total expenses ........................................................................
347,200
Income before income taxes .......................................................
$185,630
Income taxes (30%) ......................................................................
55,689
Net income...............................................................................
$129,941
*0.60 $236,950 = $142,170
$53,800 expenses incurred after technological feasibility has been established

but before software is available for production would be capitalized and its amortization included in the $32,150 added to cost of goods sold.
1052.
1.
Salvino Company
Analysis of Land Account
For 2013
Balance at January 1, 2013.......................................................

Land site 653:
Acquisition cost ...................................................................
Commission to real estate agent........................................
Clearing costs .................................................... $25,000
Less: Amounts recovered.................................
20,000
Total land site 653 ..........................................................
Land site 654:
Land and building acquisition cost....................................
Demolition cost ....................................................................
Total land site 654 ..........................................................
Balance at December 31, 2013 .................................................
$ 150,000
$1,600,000
90,000
5,000
1,695,000
$ 700,000
30,000
730,000
$2,575,000
408
Chapter 10
1052. (Concluded)
Salvino Company
Analysis of Buildings Account
For 2013
Balance at January 1, 2013....................................................
Cost of new building constructed on land site 654:
Construction costs ...........................................................
Excavation fees.................................................................
Architectural design fees .................................................
Building permit fee ...........................................................
Balance at December 31, 2013 ..............................................
$ 910,000
$600,000
35,000
19,000
15,000
669,000
$1,579,000
Salvino Company
Analysis of Leasehold Improvements Account
For 2013
Balance at January 1, 2013............................................................................
Electrical work ................................................................................................
Construction of extension to current work area ($80,000 1/2)................
Office space ....................................................................................................
Balance at December 31, 2013 ......................................................................
$500,000
60,000
40,000
70,000
$670,000
Salvino Company
Analysis of Machinery and Equipment Account
For 2013
Balance at January 1, 2013...........................................................
Cost of new machines acquired:
Invoice price .............................................................................
Freight costs.............................................................................
Unloading charges...................................................................
Balance at December 31, 2013 .....................................................
2.
$600,000
$90,000
2,000
2,500
94,500
$694,500
Items that were not used to determine the answer to (1) and where, or if, these
items should be included in Salvinos financial statements are as follows:
a. Imputed interest of $60,000 on funds used during construction should not be
included anywhere in Salvinos financial statements. Only actual interest
incurred can be capitalized.
b. Land site 655, which was acquired for $600,000, should be included in Salvinos balance sheet as land held for resale.
c. Painting of ceilings for $10,000 should be included as a normal operating expense in Salvinos income statement.
d. Royalty payments of $13,000 should be included as a normal operating
expense in Salvinos income statement.
Chapter 10
409
1053.
Davis Company
Analysis of Changes in Noncurrent Operating Assets
For the Year Ended December 31, 2013
Balance
Dec. 31, 2012
Increase
Land ......................................... $ 280,000
$ 237,250*
Land improvements................
141,000
Buildings ................................. 1,150,000
492,750*
Machinery and equipment .....
924,000
223,000
Automobiles ............................
113,000
26,400
Leasehold improvements ......
277,000
$2,744,000
$1,120,400
Balance
Decrease Dec. 31, 2013
$ 517,250
141,000
1,642,750
$22,000
1,125,000
139,400
277,000
$22,000
$ 3,842,400
COMPUTATIONS:
*Plant facility acquired from Matthews January 6, 2013allocation to land and
building fair value10,000 shares of Davis common stock at $73
per share market price .........................................................................
$730,000
Allocation in proportion to appraised values at the exchange date:
Amount
% of Total
Land....................................
$195,000
32.5%
Building..............................
405,000
67.5
$600,000
100.0%
Land ($730,000 0.325) ......................................................
Building ($730,000 0.675) ................................................
$237,250
492,750
$730,000
Machinery and equipment purchased July 1, 2013:

Invoice cost....................................................................
$187,000
Delivery cost ..................................................................
14,000
Installation cost .............................................................
22,000
Total acquisition cost ...............................................
$223,000
(Note: The land purchased November 4 would be reported as an investment, not
as a noncurrent operating asset.)
410
Chapter 10
1054.
1. 2013 interest accrued:
12%, 5-year note ($2,000,000 0.12) ...................................................
10%, 10-year bonds ($8,000,000 0.10) ..............................................
13%, 3-year loan ($2,000,000 0.13) ...................................................
Total interest accrued2013* ........................................................
*Maximum that can be capitalized.
2.
$ 240,000
800,000
260,000
$1,300,000
Weighted-average interest rate, general liabilities:

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

Interest
Fraction
Capitalization of the Year
Amount
Rate
Outstanding
Capitalized
Interest
Expenditures
Ship 341:
Accum. expenditure............ $1,150,000
April 1, 2013 ......................... 1,200,000
10.4%
10.4
6/12
3/12
$ 59,800
31,200
Ship 342:
Accum. expenditure............
May 1, 2013 ..........................
1,200,000
1,600,000
10.4
10.4
9/12
5/12
93,600
69,333
750,000
1,250,000
950,000
13.0
13.0
10.4
12/12
6/12
6/12
97,500
81,250
49,400
810,000
10.4
4/12
28,080
Ship 343:
Accum. expenditure............
July 1, 2013 ..........................
Ship 344:
Sept. 1, 2013 ........................
Ship 345:
Nov. 1, 2013 .........................
360,000
10.4
2/12
Total capitalized interest for 2013 ...........................................................
6,240
$516,403
Chapter 10
411
1055.
1.
Self-Constructed Equipment Cost

Stated at Full Cost
Services of consulting engineer ...................................................................

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

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

Stated at Incremental Cost
Services of consulting engineer ..................................................................

Work subcontracted ......................................................................................
Materials .........................................................................................................
Production labor ............................................................................................
Variable manufacturing overhead (50% of $52,000) ..................................
Postage, telephone, supplies, and miscellaneous expenses ...................
Total...........................................................................................................
$ 10,000
20,000
200,000
65,000
26,000
10,500
$331,500
412
Chapter 10
1055. (Concluded)
3.
The greatest amount that should be capitalized as the cost of equipment is

$400,000the low bid from a reputable manufacturer. This includes at least a
part of the overhead incurred other than the strictly variable overhead. Most accounting authorities recommend that for self-constructed assets, overhead
should be allocated on the same basis as other production when a plant is not
operating at capacity. This has the effect, however, of increasing net income because of the reduced overhead allocation to normal production. Any cost incurred from the self-construction of an asset computed on a full cost basis that
is in excess of the cost of a comparable asset from a reputable supplier might be
considered a loss and thus charged against revenues of the current period.
1056.
Approach 1: FV = $10,000; I = 6%; N = 20 years
Approach 2: FV = $250,000; I = 6%; N = 20 years
Approach 3: FV = $1,200,000; I = 6%; N = 20 years
Present
Value
Approach 1
$ 3,118
Approach 2
77,951
Approach 3
374,166
Total estimated fair value
$3,118
$77,951
$374,166
Probability
0.15
0.25
0.60
Probability-Weighted
Present Value
$
468
19,488
224,500
$244,456
Nuclear Waste Repository Site ................................................

Cash ......................................................................................
700,000
Nuclear Waste Repository Site ................................................

Asset Retirement Obligation...............................................
244,456
700,000
244,456
Chapter 10
413
1057.
1.
Current Assets....................................................................
Land, Buildings, and Equipment (net)..............................
Goodwill...............................................................................
Current Liabilities .........................................................
Long-Term Liabilities....................................................
Cash ...............................................................................
340,000
260,000
1,085,000
25,000
160,000
1,500,000
2. The possible reasons Aurora was willing to pay an extra $1,085,000 for Payette
include
Payette has a strong organization with trained staff already in place.

Payette has an efficient production and distribution network that is up and
running.
Payette has good relationships with its banks and suppliers.
Payette sells a superior product that has a well-established market niche.
3.
4.
Current Assets....................................................................
Gain..................................................................................
Current Liabilities...........................................................
Long-Term Liabilities .....................................................
Cash.................................................................................
340,000
260,000
Current Assets....................................................................
Gain..................................................................................
Current Liabilities...........................................................
Long-Term Liabilities .....................................................
Cash.................................................................................
340,000
260,000
65,000
25,000
160,000
350,000
265,000
25,000
160,000
150,000
1058.
1.
2013:
Interest Expense.................................................................
Construction in Progress ..................................................
Accrued Interest Payable...................................................
Cash ...............................................................................
2012:
Interest Expense.................................................................
Construction in Progress ..................................................
Accrued Interest Payable .............................................
Cash ...............................................................................
470,000
350,000
8,000
828,000
410,000
260,000
13,000
657,000
414
Chapter 10
1058. (Concluded)
2.
2013 Statement of Cash Flows:

In the Cash Flows from Operating Activities section:
Decrease in accrued interest payable ...............................................
$ (8,000)
In the Cash Flows from Investing Activities section:

Increase in construction in progress.................................................
(350,000)
Supplemental Disclosure:
Cash paid during the year for interest (amount of interest paid
net of the amount capitalized) ............................................................
478,000
2012 Statement of Cash Flows:

In the Cash Flows from Operating Activities section:
Increase in accrued interest payable.................................................
$ 13,000
In the Cash Flows from Investing Activities section:

Increase in construction in progress.................................................
(260,000)
Supplemental Disclosure:
Cash paid during the year for interest (amount of interest paid
net of the amount capitalized) ............................................................
397,000
1059.
1.
Return on equity = Net income Stockholders equity

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

(a) Decrease net income and total assets by $15 million capitalized R&D.
(b) Decrease paid-in capital and total assets by $12 million to reflect market value
of the stock.
(c) The equipment should be recorded at the present value of the payment
stream.
Present value = $1,000,000 + [$3,000,000 (PVAF, n = 8, i = 12%)]
= $1,000,000 + [$3,000,000 (4.9676)]
= $15,902,800
PMT = $3,000,000; N = 8; I = 12% PV = $14,902,919
$1,000,000 + $14,902,919 = $15,902,919
$25,000,000 $15,902,800 = $9,097,200
Decrease total liabilities and total assets by $9,097,200.
Chapter 10
415
1059. (Concluded)
(d) Decrease net income and total assets by $7 million.
After the adjustments, net income is $16 million ($38 million $15 million $7
million); total assets are $281.9028 million ($325 million $15 million $12
million $9.0972 million $7 million); total liabilities are $170.9028 million
($180 million $9.0972 million); total equity is $111 million ($145 million $15
million $12 million $7 million).
Return on equity = $16 million $111 million
= 14.4%
After the adjustments, Cole does not meet its profitability goal. Note that item
(c) does not affect the value of ROE and that item (b) actually has the effect of
increasing ROE (by decreasing equity).
3.
The auditors should catch this kind of accounting abuse. However, even a good
audit may fail to detect such abuses when employees collude in order to bias the
accounting numbers in some way.
1060.
(a) Buildings...................................................................................
462,000
Cash ......................................................................................
462,000
To record cost of addition to building.
(Expenditures for additions are capitalized and are depreciated over the life of
the asset.)
(b) Loss on Removal of Wall (or Operating Expense) ...............
26,020
Cash ......................................................................................
26,020
To record cost of removal of plant
wall$23,410 + $2,610.
(Cost to tear down old wall not considered part of new wall cost. No benefit to
future periods from old wall.)
(c) Accumulated DepreciationBuildings .................................
17,300
Cash ..........................................................................................
6,570
Depreciation Expense .............................................................
10,030
Buildings ..............................................................................
33,900
To cancel book value identified with plant wall
and to record amount received from salvage.
(The removed wall will not benefit future operations and therefore should be
eliminated from the books.)
416
Chapter 10
1060. (Concluded)
(d) Accumulated DepreciationBuildings ......................................
Depreciation Expense ..................................................................
Buildings ...................................................................................
To remove cost of old floor covering.
6,250
6,750
Floor Covering ..............................................................................

Cash ...........................................................................................
To record cost to replace flooring.
9,190
(e) Painting Expense ..........................................................................

Cash ...........................................................................................
To record maintenance charge for repainting.
12,420
(f) Accumulated DepreciationBuildings ......................................

Buildings ...................................................................................
To remove cost of old shelving.
990
1,210
Shelving .........................................................................................
Cash ...........................................................................................
To record cost of new shelving.
4,180
(g) Buildings........................................................................................
Cash ...........................................................................................
To record cost of new wiring.
(Wiring has same remaining useful life as the building.)
13,440
Accumulated DepreciationBuildings ......................................

Buildings ...................................................................................
To record the removal of old wiring.
1,900
3,210
(h) Buildings........................................................................................
Discount on Notes Payable..........................................................
Notes Payable ...........................................................................
To record cost of new fixtures.
(Electrical fixtures have the same remaining useful life as the
building.)
9,440
800
Accumulated DepreciationBuildings ......................................

Buildings ...................................................................................
To record the removal of old fixtures.
1,410
1,890
13,000
9,190
12,420
2,200
4,180
13,440
5,110
10,240
3,300
Chapter 10
417
1061.
Customer List
Outcome 1: PMT = $40,000; I = 7%; N = 5 years
Outcome 2: PMT =
18,000; I = 7%; N = 4 years
Outcome 3: PMT =
9,000; I = 7%; N = 3 years
Present
Value
Outcome 1
$164,008
Outcome 2
60,970
Outcome 3
23,619
Probability
0.20
0.30
0.50
$164,008
60,970
23,619
Present Value
$32,802
18,291
11,810
$62,903

Ongoing Research Project
Outcome 1: PMT = $450,000; I = 7%; N = 10 years $3,160,612
Outcome 2: PMT =
12,000; I = 7%; N = 4 years
40,647
Outcome 3: PMT =
500; I = 7%; N = 3 years
1,312
Present
Value
Outcome 1
$3,160,612
Outcome 2
40,647
Outcome 3
1,312
Customer list.............
Ongoing research .....
Probability
Present Value
0.10
$316,061
0.20
8,129
0.70
918
$325,108
Cost Allocation
Estimated
According to
Fair Values
Relative Estimated Values
$ 62,903
$62,903/$388,011 $300,000
325,108
$325,108/$388,011 $300,000
$388,011
Customer List........................................................................................
R&D Expense*.......................................................................................
Cash .................................................................................................
Cost
Assigned to
Individual Items
$ 48,635
251,365
$300,000
48,635
251,365
300,000
418
Chapter 10
1062.
1.
Land
Buildings
Equipment
Total fixed assets
2013
$ 600,000
900,000
350,000
$1,850,000
2012
$ 400,000
800,000
250,000
$1,450,000
Fixed asset turnover: $4,800,000/[($1,850,000 + $1,450,000)/2] = 2.91

2.
(Note: The LIFO reserves are fair value adjustments that relate to current assets
instead of long-term assets. Also, it is reasonable to assume that the fair values
of cash and accounts receivable are close to their book values.)
Fair value of fixed assets: Fair value of total assets Cash Accounts
receivable Inventory LIFO reserve
2013:
2012:
$3,800,000 $50,000 $300,000 $650,000 $150,000 = $2,650,000

$3,000,000 $45,000 $220,000 $510,000 $100,000 = $2,125,000
Fixed asset turnover: $4,800,000/[($2,650,000 + $2,125,000)/2] = 2.01

3.
It is difficult to tell whether Progressive is more or less efficient at using its fixed
assets than is Steady State. Based on the reported financial numbers, Progressives fixed asset turnover is 2.91, whereas the ratio for Steady State is only 2.5.
However, as shown in (2), this difference may result from a difference between
book value and fair value of reported long-term assets. If Steady State has relatively new fixed assets, for which the book value is quite close to the fair value,
then Progressives 2.01 fixed asset turnover ratio (based on fair values) is worse
than the 2.5 ratio value for Steady State.
1063.
1.
The correct answer is b. Capitalized interest will be based on the amount of

avoidable interest caused by the building construction. When that amount exceeds the specific funds borrowed, interest on unrelated liabilities will be capitalized. When that amount is lower than the funds borrowed, as is the case
here, the amount to be capitalized will be the lower amount of $40,000.
2.
The correct answer is b. The only time costs are capitalized as goodwill is when a
business combination occurs and the cost of the acquisition exceeds the fair
market value of the underlying net identifiable assets acquired. Neither the cost
of developing nor of maintaining goodwill is capitalized.
Chapter 10
419
CASES
Discussion Case 1064
Each of the five items introduced in the case is discussed.
(a)
Recorded book values on the books of the seller are irrelevant to the buyer. Fair values of all identifiable assets, both tangible and intangible, should be used to make the entry to record the purchase.
Appraisal values are one source of estimated fair values. Other possible sources include recent
sales of similar assets and engineers estimates of building costs. In this instance, the appraisal for
fire insurance purposes is recent enough that it probably could be used for purposes of recording the
purchase. The land value would be $35,000, or 1/5 of the building value. One could object to the
values in the appraisal for fire insurance coverage because of its potential bias toward higher values
to sell more insurance coverage. Evaluation of the reputation of the fire insurance company and its
appraisers would be required to determine the extent of such bias.
(b) Replacement costs of equipment can be used as a basis for determining the fair value of such assets. Because it is easier to obtain replacement costs on new equipment than it is to determine the
market value for used equipment that exactly matches the age and condition of the assets owned, it
is common practice to use the new market price and then depreciate it to the estimated age of the
used equipment. In this instance, the new cost is estimated to be $450,000, and the depreciated
value of 50% of the cost new, $225,000, would be a reasonable estimate of the market price of the
old equipment.
(c)
Franchises can be very valuable assets. As with tangible assets, the value recorded on the sellers
books is irrelevant to the buyer. Because the franchise is for an unlimited time, its value to the buyer
is unaffected by the time the seller used it. The current purchase price of similar franchises,
$120,000, can be used to record the purchase.
(d) The two research scientists who will transfer employment to Fugate represent a value to Fugate.
However, this human resource value is generally not recognized as an asset in our historical cost
system. Fugate would not own the scientists, and they could leave the company with no contract
penalties. Only in a few types of activities, such as professional sports, are contracts for human
resources capitalized and carried on the books as assets. In a business acquisition, the intangible
value of at-will employees is not recognized but is included as part of goodwill. In this case, the researchers salaries will be charged to expense as they are paid. The accounting for human resources is one accounting area that is certain to develop in the future.
(e)
Patents are valuable assets that can be owned and transferred. The fair value of the patent is the
appropriate measure of the asset value at the transaction date and the zero book balance on
Gleaves books is not relevant to Fugate.
The total fair value of the assets acquired would be as follows:

Land .............................................................
$ 35,000
Building ........................................................
175,000
Equipment ....................................................
225,000
Franchise .....................................................
120,000
Patents .........................................................
150,000
Total ..........................................................
$705,000
420
Chapter 10
(Concluded)
Because only $556,950 was paid for these assets, this was a bargain purchase. The journal entry would
be as follows:
Land .............................................................
Building ........................................................
Equipment ....................................................
Franchise .....................................................
Patents .........................................................
Gain .......................................................
Cash ......................................................
35,000
175,000
225,000
120,000
150,000
148,050
556,950

This case addresses the problems associated with accounting for software development costs. Strategy
wants its financial statements to present a favorable picture of the companys financial condition and operating performance. If the owner is correct in predicting that this years research and development costs
will be recovered through sales in the following year, a strong argument could be made to defer the costs
incurred this year and match them against next years revenues. The central issue, however, is whether
the sales will actually materialize next year. The uncertainty of predicting future sales led the FASB to
conclude that until technological feasibility has been established, costs to develop software should be
expensed. It is unclear from this case how much of the $45,000 was related to products for which technological feasibility had been established and how much related to new products still in the preliminary design and testing stages. To the extent that the costs were incurred for new products for which technological feasibility had not been established, the CPA is correct in insisting that these costs be expensed as
required by the FASB.

From the brief description of Arnold, it is reasonable to assume that Arnold spends a lot for research and
development (R&D) and for advertising. On theoretical grounds, both of these can be argued to be capital
expenditures. However, R&D must be expensed as incurred and advertising expenditures are usually
treated in the same way. This can result in a substantial amount of real economic assets that are not recorded on the balance sheet. For example, assume that Arnold spends an average of $300,000 per year
on R&D and $400,000 per year on advertising and that the average economic life of the assets created is
five years for the R&D expenditures and three years for the advertising. This means that Arnold has unrecorded assets of $2,700,000. If these assets were reported on the balance sheet, Arnolds ROA would be
about the same as that for Baker.
Other assets that are not shown on companies balance sheets include the value of asset appreciation,
key employees, favorable market position, and good reputation with suppliers, creditors, and employees.
The lack of comparability is an issue because some companies have large amounts of unrecorded assets
and others do not. For example, two companies may both have pieces of land with a current market value
of $500,000. However, one company may show the land at $100,000 because it was purchased years
ago while the other may have purchased it just recently and thus will show it at $500,000.
A comparison of the book values of companies (total assets total liabilities) and the market values of
those companies as measured by total market value of shares outstanding illustrates that there is considerable variability among companies, a fact that suggests companies often have large amounts of unrecorded assets.
Chapter 10
421

The rule requiring firms to expense R&D outlays results in a decrease in net income for most firms. A
decrease in reported net income can impact a firm in several ways:
Managers bonuses are frequently based on reported earnings.
Loan covenants are often written in terms of reported earnings.
Some investors seem to rely on the naive use of reported earnings in picking stocks.
Accordingly, managers compensation may suffer when R&D expenditures are expensed, and those
managers may be less willing to authorize R&D projects. This is in spite of the fact that the R&D might be
beneficial for the firms long-run profitability.
It might be expected that in response to an accounting standard change, management bonus plans, loan
covenants, and investors decision rules would be adapted to allow for the change in reported earnings
brought about solely because of the accounting change. However, there is evidence that such adjustments are not always made.

The estimated Gillette brand value is relevant both to outsiders who wish to value Gillette stock and to
Gillettes management who wish to monitor the impact of their actions on Gillettes most valuable asset
the brand name.
However, reading the description of the 4-stage estimation process casts doubt on the reliability of the
estimate. The valuation estimate requires assumptions about the following quantities:
An appropriate sales-to-asset ratio
The baseline return on sales of a generic brand in Gillettes industry
Gillettes marginal tax rate
The brand strength multiple

Given the assumptions made by Financial World magazine, the computed brand value is $10.3 billion, but
slightly different estimates could result in numbers anywhere from $5 billion to $15 billion.
This may be a good example of a situation in which disclosure is better than recognition. Recognizing a
point estimate of the brand value gives an illusion of precision. Disclosing the brand value in the notes,
along with the assumptions underlying the computation, gives financial statement users a more realistic
impression of the estimated value.

1.
Appreciation in asset values is a large part of the business of a real estate firm. Because of this and
because generally accepted accounting rules require long-term assets to be depreciated, many users of financial statements think that historical cost financial statements for real estate companies
can be particularly uninformative. For a further discussion, see Edward P. Swanson and Frederick
Niswander, Voluntary Current Value Disclosures in the Real Estate Industry, Accounting Horizons,
December 1992, p. 49.
2.
Daimler-Benz was willing to reveal the magnitude of its hidden reserves in order to comply with U.S.
GAAP as a prerequisite to listing its shares on the New York Stock Exchange.
Hidden reserves are a result of the prudence principle: the primary goal of current management is
to make sure that the firm survives into the future to the benefit of stockholders, creditors, employees, local economies, and so on. One way to build up a financial cushion to increase the probability
of survival is to pay out small cash dividends. In many jurisdictions, the amount of cash dividends is
tied to the amount of reported income. Accordingly, the prudence principle dictates the recording of
accelerated depreciation in order to lower reported income and reduce the payment of cash dividends.
422
Chapter 10

3.
(Concluded)
SEC dissatisfaction with asset revaluations in the 1920s and 1930s was mainly a result of unease
about the methods used to compute the revaluations, not about the notion of revaluation per se.
When there is an established market for an asset, revaluation to market value is almost as objective
and verifiable as using historical cost. An auditor is understandably wary about appraisals and estimates; however, market values from an active market are not as subjective.
Case 1070
1. Because Disney has developed its brand name itself instead of purchasing it from another company,
no value is recognized in the financial statements. However, Disney does recognize the costs of registering and successfully defending its rights and trademarks.
2. In Note 9, Disney discloses: The Company capitalizes interest on assets constructed for its parks,
resorts, and other property, and on theatrical productions. In 2009, 2008 and 2007, total interest capitalized was $57 million, $62 million and $37 million, respectively.
Supplemental cash flow information at the bottom of Disneys cash flow statement states that cash
paid for interest in 2009 was $485 million. This cash paid relates to interest reported as interest expense, not to the capitalized interest.
If it is assumed that all the capitalized interest was paid in cash in 2009, the summary journal entry to
record interest for the year is as follows:
Projects in Progress .............................................
Interest Expense .................................................
Interest Payable................................................
Cash ($485 + $57) ..........................................
57
466
19
542
3. Note 2 explains Disneys amortization policy for intangible assets. The following explanation is included under the subheading Goodwill and Other Intangible Assets:
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment
on an annual basis and between annual tests if current events or circumstances require an interim
impairment assessment. Goodwill is allocated to various reporting units, which are generally an operating segment or one reporting level below the operating segment. The Company compares the fair
value of each reporting unit to its carrying amount to determine if there is potential goodwill impairment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded
to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value
of its goodwill.
Amortizable intangible assets, principally copyrights, are generally amortized on a straight-line basis
over periods of up to 31 years.
Chapter 10
423
Case 1070 (Concluded)

4. The business segment information in Note 1 states that capital expenditures for each of Disneys operating segments were as follows in 2009 (in millions):
Media Networks
Cable Networks..
151
Broadcasting
143
Parks and Resorts:
Domestic ............................................................
1,039
International .......................................................
143
Studio Entertainment ................................................
135
Consumer Products..................................................
46
Interactive Media.
21
Corporate..................................................................
75
Total (doesnt add exactly because of rounding) $1,753
Case 1071
To:
Controller, Hunter Company
From:
[Student Name]
Subject: Accounting for the Finch Land Transfer
The land to be transferred from Rosalyn Finch should be recorded as an asset on the books of Hunter
Company. The title to the land is being transferred unconditionally, so there really is no question on this
issue.
The difficult issue here is how to value the land. The two major concerns are as follows:
1. Rosalyn Finch is an officer of the company, so this qualifies as a related-party transaction. The consideration given to Finch may not be an unbiased indication of the fair value of the land. It may be advisable for Hunter Company to commission an external appraisal in order to determine an independent value for the land.
2. Computing a value for the employment contract and royalty contract given to Finch in exchange for
the machine will be very difficult. Regarding the employment contract, unless it involves an agreement to pay Finch a salary in excess of the fair value of her services, the contract should not be accounted for any differently than any other employment contractthat is, no value should be attached
to the contract. The royalty provision is based on future sales, making the value of the contract difficult to estimate.
For the two reasons outlined above, every attempt should be made to value the land using an independent outside appraisal.
424
Chapter 10
Case 1072
The general outline of facts in this ethical dilemma matches the actual facts of the Chambers Development case. The same audit firm had been on the Chambers engagement for a number of years, and former audit partners from the firm were employed by Chambers.
The heroes in this case were the members of the new team of auditors who were able to overcome the
obvious pressures to cover up the wrongful capitalization of landfill costs.
This case illustrates a difficult conflict between doing what is best for the firm that employs you and doing
what will please your immediate supervisor. If the auditors on the Chambers job had just ignored the accounting irregularities they found, their audit firm could have been liable for huge damages in subsequent
years when the truth was finally revealed. So, it was clearly in the best interests of the audit firm for the
auditors to blow the whistle. However, a staff auditor would still be reluctant to raise the issue with a manager or partner who may have approved the fishy accounting in previous years.
The accounting announcement on March 17, 1992, was just the beginning of troubles for Chambers.
Continuing business problems eventually forced the board of directors of Chambers to put the company
up for sale. Chambers was acquired by USA Waste on June 30, 1995.
Articles that contain more information on the interesting Chambers Development case include:
Gabriella Stern and Laurie P. Cohen, "Chambers Development Switches Accounting Plan," The Wall
Street Journal, March 19, 1992, p. B4.
Roula Khalaf, "Fuzzy Accounting," Forbes, June 22, 1992, p. 96.
Gabriella Stern, "Audit Report Shows How Far Chambers Would Go for Profits," The Wall Street Journal,
October 21, 1992, p. A1.
Case 1073
Solutions to this problem can be found on the Instructors Resource CD-ROM or downloaded from the
Web at www.cengage.com/accounting/stice.

Stice 18e Ch10 SOL Final

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Stice 18e Ch10 SOL Final

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To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.

chased trademarks are recorded at the

rials, factory overhead, and any other

understated. Furthermore, subsequent

8. Under IAS 23, a company capitalizes the

12. Many companies establish a minimum

9. a. If the donation of the property by the

makes a contribution to periodic revenue. Net income will be understated in

and owners equity for the first year and

24. Under the provisions of IAS 16, the credit

Business calculator keystrokes:

Interest Expense .....................................................................

Interest expense: ($160,000 $49,304) 0.09 = $9,963

EXCHANGE OF NONMONETARY ASSETS

COST OF A SELF-CONSTRUCTED ASSET

CAPITALIZED INTEREST: SINGLE-YEAR COMPUTATION

Amount of capitalized interest = $33,833

Cost of building = $600,000 + $33,833 = $633,833

CAPITALIZED INTEREST: JOURNAL ENTRY

Total interest: ($100,000 0.10) + ($2,000,000 0.13) = $270,000

CAPITALIZED INTEREST: MULTIPLE-YEAR COMPUTATION

Amount of capitalized interest = $111,898

Cost of building = $1,133,833 + $111,898 = $1,245,731

ACCOUNTING FOR AN ASSET RETIREMENT OBLIGATION

Business Calculator Keystrokes:

RENEWALS AND REPLACEMENTS

Heating/Cooling System .................................................................

RESEARCH AND DEVELOPMENT

Normal: Expense all$120,000 + $100,000 = $220,000

OIL AND GAS EXPLORATION COSTS

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

ACCOUNTING FOR THE ACQUISITION OF AN ENTIRE COMPANY

Cash price ..................................................................................

ACCOUNTING FOR A BARGAIN PURCHASE

Cash price ..................................................................................

INTANGIBLES AND A BASKET PURCHASE

INTANGIBLES AND A BUSINESS ACQUISITION

FIXED ASSET TURNOVER RATIO

DANGER IN USING FIXED ASSET TURNOVER RATIO

During the construction period, the expenditures will be charged as

Purchase of land ...................................... $282,000

Dividends, $4,000, should be closed to Retained Earnings. Damages

*$34,000 lab expenses + $16,800 wages (40% of $42,000) = $50,800

$6,000 metal + $2,600 blueprints + $25,200 wages (60% of $42,000) = $33,800

1023. Land [($600,000 2/3) $600,000] .............................

*Franchise: $1,450,000 $1,237,000 (sum of patent,

Notes Payable ......................................................

Notes Payable ......................................................

Value of the equipment considering interest at 9%

Discount on Notes Payable.............................................

*Market value of stock .....................................................$1,060,000

Cost to construct special equipment:

*Interest charge: $1,045,000 10% 3/12 year = $26,125

Computation of the amount of interest to be capitalized for 2013 is as

Weighted-average rate = $161,000 $1,300,000 = 12.4% (rounded)

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

Interest capitalized in 2014 is restricted to the total interest incurred of $311,000*

NC. The construction does not cover an extended period of time.

Business Calculator Keystrokes:

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

1. Successful efforts method:

Internet domain name ..

Internet Domain Name ...................................................

The government contacts intangible is not separately recognized