Bolduc
Unit Heather 1
Chapter 10 Exercises
10-1 Acquisition costs; land and building
On March 1, 2011, Beldon Corporation purchased land as a factory site for $60,000. An old
building on the property was demolished, and construction began on a new building that was
completed on December 15, 2011 Cost incurred during this period are listed below:
Demolition of old building
$4,000
Architects fees (for new building)
12,000
Legal fees for title investigation of land
2,000
Property taxes on land (for period beginning March 1, 2011)
3,000
Construction costs
500,000
Interest on construction loan
5,000
Salvaged materials resulting from the demolition of the old building were sold for $2,000.
Required: Determine the amounts that Beldon should capitalize as the cost of the land and the
new building.
Solution:
Computation
of the
Capitalize cost
of the land and
New Building
Cost of land:
Particulars
Amount
Land
$ 60,000.00
demolition
$
4,000.00
legal fees
$
2,000.00
salvage
materials
$ (2,000.00)
Cost of Land
$ 64,000.00
Cost of
building:
Particulars
construction
costs
interest on
construction
loan
architect
Cost of
Building
Hence the cost
of building
and cost of
land is
Amount
$ 500,000.00
$
$
5,000.00
12,000.00
$ 517,000.00
$ 517,000.00
$ 64,000.00
Property taxes are operating costs
10-2 Acquisition cost; machinery
Oaktree Company purchased a new machine and made the following expenditures:
Purchase price
$45,000
Sales tax
2,200
Freight charges for shipment of machine
700
Insurance on the machine for the first year 900
Installation of machine
1,000
The machine, including sales tax, was purchased on open account, with payment due in 30 days.
The other expenditures listed above were paid cash.
Required: Prepare the necessary journal entries to record the above expenditures.
Solution: Computation of the Necessary Journal Entries
Machine costs:
purchase price
sales tax
freight
installation
Total cost of machine
$
45,000
$
2,200
$
700
$
1,000
$
48,900
Rule: Include all the costs to get the asset "in place and
working"
Ignore: Insurance (operating
costs)
Entry would be
Machine A/c---------------------Dr
$
48,900
$47,
To Account Payable A/c
200
To Cash A/c
700
$1,
$900
Prepaid Insurance A/c------------Dr
.00
$900
To Cash A/c
10-3 Acquisition costs; lump-sum acquisition
.00
Semtech Manufacturing purchased land and building for $4 million. In addition to the purchase
price, Semtech made the following expenditures in connection with the purchase of the land and
building:
Title insurance
Legal fees for drawing the contract
Pro-rated property taxes for the period after acquisition
State transfer fees
$16,000
5,000
36,000
4,000
An independent appraisal estimated the fair values o the land and building, if purchased
separately, at $3.3 and $1.1 million, respectively. Shortly after acquisition, Semtech spent
$82,000 to construct a parking lot and $40,000 for landscaping.
Required:
1. Determine the initial valuation of each asset Semtech acquired in these transactions.
2. Repeat requirement 1, assuming that immediately after acquisition, Semtech demolish the
building. Demolition costs were $250,000 and the salvaged materials were sold for $6,000. In
addition, Semtech spend $86,000 clearing and grading the land in preparation for the
construction of a new building.
Requirement 1
Cost of land and building:
Purchase price
Title search and insurance
Legal fees
State transfer fees
Total cost
$4,000,000
16,000
5,000
4,000
$4,025,000
Percent of Total
Fair Value
Asset
Land
Building
Fair Value
$3,300,000
1,100,000
$4,400,000
Assets:
Land
Building
Land improvements:
75%
25
100%
$3,018,750
1,006,250
Initial
Valuation
(Percent x
$4,025,000)
$3,018,750
1,006,250
$4,025,000
Parking lot
Landscaping
82,000
40,000
Requirement 2
Cost of land:
Purchase price
Title search and insurance
Legal fees
State transfer fees
Demolition of old building
Less: Sale of materials
Clearing and grading costs
Total cost of land
$4,000,000
16,000
5,000
4,000
$250,000
(6,000)
244,000
86,000
$4,355,000
Land improvements:
Parking lot
Landscaping
82,000
40,000
10-6 Goodwill
On March 31, 2011, Wolfson Corporation acquired all of the outstanding common stock of Barney Corporation f
$17,000,000 in cash. The book values and fair values of Barney's assets and liabilities were as follows:
Book Value
Current Assets
Property,
plant, and
equipment
Other assets
Current
liabilities
Long-term
liabilities
$6,000,000
Fair Value
$7,500,0
1,000,000
14,000,
1,500,
4,000,000
4,000,
6,000,000
5,500,
11,000,000
Required:
Calculate the
amount paid
for goodwill
Goodwill is the excess, if any, of net assets acquired, at fair market value, over the purchase
price.
Here Net Assets at fair value = 13,500,000, so Goodwill will be 3,500,000
10-8 Lump-Sum Acquisition
Pinewood Company purchased two buildings on four acres of land. The lump-sum purchase was $900,000.
According
to independent appraisals, the fair values were $450,000 (building A) and $250,000 (building B) for the buildings
and
$300,000
for the
land.
Required:
Detemrin
e the
initial
valuation
of the
buildings
and the
land.
Solution:
Computation of
the Initial
Valuation of the
buildings and
land
Assets
Land
Building
A
Building
B
10-10 Acquisition costs; noninterest-bearing note
Teradene Corporation purchased land as a factory site and contracted with Maxtor Construction to construct a fac
Teradene made the following expenditures related to the acquisition of the land, building, and machinery to equip
the
factory:
Purchase
price of
the land
$1,200,00
0
Demolitio
n and
removal
of land
before
constructi
on
Various
closing
costs old
building
Clearning
and
grading
the in
connectio
n with
acquiring
the land
Architect'
s fee for
the plans
for the
new
building
Payments
to Maxtor
for
building
constructi
on
Machiner
y
purchased
Freight
charges
on
machiner
y
Trees,
plants,
and other
landscapi
ng
80,000
150,000
42,000
50,000
3,250,000
860,000
32,000
45,000
Installatio
n of a
sprinkler
system
for the
landscapi
ng
Cost to
build
special
platforms
and
install
wiring for
the
machiner
y
Cost of
trial runs
to ensure
proper
installatio
n of the
machiner
y
Fire and
theft
insurance
on the
factory
for the
first year
of use
5,000
12,000
7,000
24,000
In addition to the above expenditures, Teradene purchased four forklifts from Caterpillar. In payment, Teradene
paid $16,000 cash and signed a noninterest-bearing note requiring the payment of $70,000 in one year. An interes
rate of
7%
properly
reflects
the time
value of
money
for this
type of
loan.
Required:
Determine the initial valuation of each of the assets Teradene acquired in the above transactions.
Solution: Computation of the Initial Valuation of each of the Assets
Teradene
Land
Particulars
Amount
$
Purchase price
1,200,000
Demolition and
removal of old
$
building
80,000
Clearing and
$
grading
150,000
$
Closing costs
42,000
$
Total cost of land 1,472,000
Building
Particulars
Architects fees
Construction cost
Total cost of
building
Machinery:
Particulars
Purchase price
Freight charges
Special platforms
and wire
installation
Cost of trial runs
Total cost of
Machinery
Amount
$
50,000
$
3,250,000
$
3,300,000
Amount
$
860,000
$
32,000
$
12,000
$
7,000
$
911,000
Land
improvements
Particulars
Amount
$
Solution:
Computa
tion of
the
Journal
Entries
Particula
rs
Amount
Feb 1
2011
Land
A/c------------------ $
Dr
90,000
To
Common
Stock A/c
$
90,000
(Being Purchased Land issuing 500 shares @ $18 per share)
Nov 2
2011
Building
A/c---------------$
Dr
600,000
To
Cash A/c
To
Revenue
Donation
of Fixed
Asset A/c
(Being
Purchases
of
Building
for cash)
$
400,000
$
Amount
200,000
10-12 fixed-asset turnover ratio, Cisco
Cisco Systems, Inc., reported the following information in its 2009 financial statements ($ in millions):
Balance
sheets
Property,
plant, and
equipment
(net)
Income
statement
Net sales
for 2009
$4,043
$4,151
$36,117
Required:
Calculate
Cisco's 2009
fixed-asset
turnover
ratio.
How would
you interpret
this ratio?
Solution: Computation
of the Fixed Asset
Turnover Ratio
Fixed Asset Turnover Ratio =
Where as
Net Sales
Avg Fixed Assets
Fixed Asset Turnover Ratio =
Fixed Asset Turnover Ratio =
Hence the Fixed Asset Turnover Ratio is
10-13 Disposal of property, plant, and equipment
Funseth Farms, Inc. purchased a tractor in 2008 at a cost of $30,000. The tractor was solf for $3,000 in 2011.
Deprecit
ation
recorded
through
the
disposal
date
totaled
$26,000.
Required:
Prepare
the
journal
entry to
record
the sale.
Assumin
g that
the
tractor
was sold
for
$10.000,
prepare
the
journal
entry to
record
the sale.
Solution: Computation of the journal entries of Disposal of property, plant, and
equipment
1)
Cash A/c-----------------Dr
Accumulated Depreciation - Tractor
A/c-----------------Dr
Loss on sale of tractor A/c-----------------Dr
To Tractor A/c
2)
Cash A/c-----------------Dr
Accumulated Depreciation - Tractor
A/c-----------------Dr
To Tractor A/c
To Gain on Sale of Tractor A/c
10-24 Interest Capitalization
On January 2, 2011, The Highlands Company began construction on a new manufacturing facility for its won
use.
The building was completed in 2012. The company borrowed $1,500,000 at 8% on January 1 to help finance
the
construction. In addition to the construction loan, Highlands had the following debt outstanding throughout
2011:
$5,000,0
00, 12%
bonds
$3,000,0
00 8%
longterm
note
Construc
tion
expendit
ures
incurred
during
2011
were as
follows:
$
6
0
0
,
0
0
0
January 1
March 31
1
,
2
0
0
,
0
0
0
June 30
Septemb
er 30
Decemb
er 31
Required:
8
0
0
,
0
0
0
600,000
400,000
Calculat
e the
amount
of
interest
capitaliz
ed for
2011
using the
specific
interest
method.
Solution
:
Comput
ation of
the
interest
capitaliz
ed for
2011
using
the
specific
interest
method
Weighte
d
average
accumul
ated
Expendit
ure=600,
000*3/1
2+1,800,
000*3/1
2+2,600,
000*3/1
2+3,200,
000*3/1
2=2,050,
000
Interest
capitaliz
ed:
Loan
10-26 Research and development
Delawar
e
Compan
y
incurred
the
followin
g
reasearc
h and
develop
ment
costs
during
2011:
Salaries
and
wages
for lab
research
Material
s used in
R&D
projects
Purchase
of
equipme
nt
Fees
paid to
outsiders
for R&D
projects
Patent
filing
and legal
costs for
a
develope
d
product
$400,00
0
200,000
900,000
320,000
65,000
Salaries ,
wages,
and
supplies
for R&D
work
performe
d
for
another
company
under
contract
Total
The
equipme
nt has a
sevenyear life
and will
be used
for a
number
of
research
projects.
Deprecia
tion for
2011
is
$120,00
0.
Required
:
350,000
$2,235,0
00
Calculate the amount of research and development expense that Delaware should report in its 2011 income statem
Solution:
The R&D equipment should be capitalized and depreciated. Same as patent filing and legal cost and R&D perfor
other company. The former is considered intangible asset and the latter is considered inventory.
R&D expense:
Salaries and wages for lab research
$400,000
Materials used in R&D projects
200,000
Fees paid to outsiders for R&D projects
320,000
R&D equipment depreciation
120,000
Total
1,040,000
10-28
1. F
2. D
3. I
4. G
5. H
6. J
7. K
8. C
9. A
10. B
11. e