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week 6 - SOLUTIONS TO EXERCISES EXERCISE 10-1(1520 minutes...

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SOLUTIONS TO EXERCISES EXERCISE 10-1 (15–20 minutes) Item Land Land Improvements Building Other Accounts (a) ($275,000) Notes Payable (b) $275,000 (c) $ 10,000 (d) 7,000 (e) 6,000 (f) (1,000) (g) 25,000 (h) 250,000 (i) 9,000 (j) $ 4,000 (k) 11,000 (l) (5,000) (m) 13,000 (n) 19,000 (o) 14,000 (p) 3,000
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EXERCISE 10-3 (10–15 minutes) 1. Truck #1 ................................................................ 13,900 Cash ............................................................. 13,900 2. Truck #2 ................................................................ 18,364* Discount on Notes Payable .............................. 1,636 Cash ............................................................. 2,000 Notes Payable ............................................ 18,000 *PV of $18,000 @ 10% for 1 year = $18,000 X .90909 = $16,364 $16,364 + $2,000 = $18,364 3. Truck #3 ................................................................ 15,200 Cost of Goods Sold ............................................ 12,000 Inventory ..................................................... 12,000 Sales ............................................................ 15,200 [Note to instructor : The selling (retail) price of the computer system appears to be a better gauge of the fair value of the consideration given than is the list price of the truck as a gauge of the fair value of the consideration received (truck). Vehicles are very often sold at a
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price below the list price.] 4. Truck #4 ................................................................ 13,000 Common Stock .......................................... 10,000 Paid-in Capital in Excess of Par (1,000 shares X $13 = $13,000; $13,000 less $10,000 par value) ......... 3,000
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EXERCISE 10-4 (20–25 minutes) Purchase Cash paid for equipment, including sales tax of $5,000. $105,000 Freight and insurance while in transit ................................ 2,000 Cost of moving equipment into place at factory ............... 3,100 Wage cost for technicians to test equipment .................... 6,000 Special plumbing fixtures required for new equipment. 8,000 Total cost .................................................................................. $124,100 The insurance premium paid during the first year of operation on this equipment should be reported as insurance expense, and not be capitalized. Repair cost incurred in the first year of operations related to this equipment should be reported as repair and maintenance expense, and not be capitalized. Both these costs relate to periods subsequent to purchase. Construction Material and purchased parts ($200,000 X .99) ................ $198,000 Labor costs .............................................................................. 190,000 Overhead costs ....................................................................... 50,000 Cost of installing equipment ................................................. 4,400 Total cost .................................................................................. $442,400
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Note that the cost of material and purchased parts is reduced by the amount of cash discount not taken because the equipment should be reported at its cash equivalent price. The imputed interest on funds used during construction related to stock financing should not be capitalized or expensed. This item is an opportunity cost that is not reported. Profit on self-construction should not be reported. Profit should only be reported when the asset is sold. EXERCISE 10-7 (20–25 minutes) (a) Avoidable Interest Weighted-Average Accumulated Expenditures X Interest Rate = Avoidable Interest $2,000,000 12% $240,000 1,800,000 10.38% 186,840 $3,800,000 $426,840 Weighted-average interest rate computation Principal Interest 10% short-term loan $1,600,000 $160,000 11% long-term loan 1,000,000 110,000 $2,600,000 $270,000
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Total Interest = $270,000 = 10.38% Total Principal
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