Solutions to PPE Practice Problems

# Solutions to PPE Practice Problems - Solutions to Property...

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Solutions to Property, Plant & Equipment Practice Problems 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 Total Interest = \$270,000 = 10.38% Total Principal \$2,600,000 (b) Actual Interest Construction loan \$2,000,000 X 12% = \$240,000 Short-term loan \$1,600,000 X 10% = 160,000 Long-term loan \$1,000,000 X 11% = 110,000 Total \$510,000 Because avoidable interest is lower than actual interest, use avoidable interest. Cost \$5,200,000 Interest capitalized 426,840 Total cost \$5,626,840 Depreciation Expense = \$5,626,840 – \$300,000 = \$177,561 30 years

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EXERCISE 10-14 (15–20 minutes) (a) Equipment ........................................................... 648,860* Discount on Notes Payable ................................ 251,140 Notes Payable ............................................ 900,000 *PV of \$180,000 annuity @ 12% for 5 years (\$180,000 X 3.60478) = \$648,860 (b) Interest Expense ................................................. 77,863* Notes Payable ..................................................... 180,000 Discount on Notes Payable ....................... 77,863 Cash ............................................................ 180,000 *(12% X \$648,860) Year Note Payment 12% Interest Reduction of Principal Balance 1/2/10 \$648,860 12/31/10 \$180,000 \$77,863 \$102,137 546,723 12/31/11 180,000 65,607 114,393 432,330 (c) Interest Expense ................................................. 65,607 Notes Payable ..................................................... 180,000 Discount on Notes Payable ....................... 65,607 Cash ............................................................ 180,000 (d) Depreciation Expense ......................................... 64,886* Accumulated Depreciation ........................ 64,886 *(\$648,860 ÷ 10)
EXERCISE 10-18 (20–25 minutes) (a) Exchange has commercial substance : Depreciation Expense ......................................... 800 Accumulated Depreciation—Melter .......... 800 (\$12,700 – \$700 = \$12,000; \$12,000 ÷ 5 = \$2,400; \$2,400 X 4/12 = \$800) Melter ................................................................... 15,200** Accumulated Depreciation—Melter ................... 8,000 Gain on Disposal of Plant Assets ............. 500* Melter .......................................................... 12,700 Cash ............................................................ 10,000 *Cost of old asset \$12,700 Accumulated depreciation (\$7,200 + \$800) (8,000 ) Book value 4,700 Fair value of old asset (5,200 ) Gain (on disposal of plant asset) \$ 500 **Cash paid \$10,000 Fair value of old melter 5,200 Cost of new melter \$15,200

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EXERCISE 10-18 (Continued) (b) Exchange lacks commercial substance : Depreciation Expense ......................................... 800 Accumulated Depreciation—Melter .......... 800 Melter ................................................................... 15,200** Accumulated Depreciation—Melter ................... 8,000 Gain on Disposal of Plant Assets ............. 500 Melter .......................................................... 12,700 Cash ............................................................ 10,000 **Cash paid \$10,000 Fair value of old asset 5,200 Cost of new asset \$15,200 Note that the entries are the same for both (a) and (b). The gain is not deferred because cash boot is greater than 25%, which makes the transaction mone- tary in nature.
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