Exercise 1

E.10-8, On December 31, 2003, Alma Ata Inc, borrowed $ 3,000,000

at 12 % payable annually to finance the construction of a new
building. In 2004, the company made the following expenditures
related to this building, March 1, $ 360,000, June 1, $ 600,000,
July 1, $ 1,500,000, December 1, $ 1,500,000. Additional
information is provided as follows :
Other debt outstanding :
10 year, 13 % bond, December 31, 1997,
interest payable annually was $ 4,000,000
6 year, 10 % note, dated December 31, 2001,
interest payable annually was $ 1,600,000
March 1, 2004, expenditure included land costs of $ 150,000
Interest revenue earned in 2004 $ 49,000
Instruction :
a. Determine the amount of interest to be capitalized in 2004 in
relation to the construction of the building
b. Prepare the journal entry to record the capitalization of interest
and the recognition of interest expense, if any, at December 31,
2004.
 Answer of Exercise 1
a. Computation of Weighted Average Accumulated
Expenditures
_ Expenditures _
Date Amount x Capitalization Period = W Average
Acc Expenditures
March 1 $ 360,000 x 10/12 =$ 300,000
June 1 $ 600,000 x 7/12 =$ 350,000
July 1 $ 1,500,000 x 6/12 = $ 750,000
Dec 1 $ 1,500,000 x 1/12 = $ 125,000
$ 3,960,000 $ 1,525,000
 Answer of Exercise 1
W Avg Acc Expenditures x Interest Rate = Avoidable Interest
$ 1,525,000 x 12 % = $ 183,000
Actual Interest
$ 3,000,000 x 12 % = $ 360,000
$ 4,000,000 x 13 % = $ 520,000
$ 1,600,000 x 10 % = $ 160,000
$ 1,040,000
Avoidable interest lower than actual
b. Building $ 183,000
Interest Expense $ 857,000
Cash $ 1,040,000 (360+520+160)
Actual interest for year $ 1,040,000
Amount capitalized ($ 183,000)
Interest expense debit $ 857,000
 Exercise 2
E.10-13, Presented below is information related to Zonker Company.
1. On July 6 Zonker Company acquired the plant assets to Doonesbury
Company, which had discontinued operations. The appraised value of
the property is :
Land $ 400,000
Building $ 1,200,000
Machinery and equipment $ 800,000
Total $ 2,400,000
Zonker Company gave 12,500 shares of its $ 100 par value common
stock in exchange. The stock had a market value of $ 168 per share
on the date of the purchase of the property.
2. Zonker Company expended the following amounts in cash between
July 6 and December 15, the date when it first occupied the building
Repairs to building $ 105,000
Construction of bases for machinery to be installed later $ 135,000
Driveways and parking lots $ 122,000
Remodeling of office space in building, including new partitions and walls $ 161,000
Special assessment by city on land $ 18,000
3. On December 20, the company paid cash for machinery $ 260,000
subject to a 2 % cash discount and freight on machinery of $ 10,500.

Instructions :
Prepares entries on the books of Zonker Company for these transactions
 Answer of Exercise 2
1. Land 350,000
Building 1,050,000
Machinery and Equipment 700,000
Common Stock (12,500 x $ 100) 1,250,000
Paid-in Capital in Excess of Par 850,000
($ 2,100,000 $ 1,250,000 = $ 850,000)
(The cost of the plant assets is $ 2,100,000, or 12,500 x $ 168,The cost is allocated in proportion to
the appraised value: 1/6 to Land, 1/2 to Building, and 1/3 to Machinery and Equipment.)

2. Buildings ($ 105,000 plus $ 161,000) 266,000

Machinery and Equipment 135,000
Land Improvements 122,000
Land 18,000
Cash 541,000

3. Machinery and Equipment 265,300

Cash 265,300
($ 10,500 + $ 254,800, which is 98 % of $ 260,000.)
 Exercise 3
P.10-8, Susquehanna Co, a wishes to exchange a machine used in its
operations. Susquehanna has received the following offers from
other companies in the industry.
1. Choctaw Company offered to exchange a similar machine plus $
23,000
2. Powhatan Company offered to exchange a similar machine
3. Shawnee Company offered to exchange a similar machine, but
wanted $ 8,000 in addition to Susquehannas machine.
In addition, Susquehanna contacted Seminole Corporation, a dealer
machines. To obtain a new machine, Susquehanna must pay $
93,000 in addition to trading in its old machine

Susquehanna Choctaw Powhatan Shawnee Seminole

Machine cost $ 160,000 $ 120,000 $ 147,000 $ 160,000 $ 130,000
Acc depreciation 50,000 45,000 71,000 75,000 0
Fair value 92,000 69,000 92,000 100,000 185,000

Instructions :
For each of the four independent situations, prepare the journal
entries to record the exchange on the books of each company.
 Answer of Exercise 3
1. Susquehanna Corporation
Cash 23,000
Machinery (new) 69,000
Accumulated Depreciation 50,000
Loss on Exchange of Machinery 18,000*
Machinery (old) 160,000
*Computation of loss: Book value $ 110,000
Fair value (92,000)
Loss $ 18,000

Choctaw Company
Machinery (new) 92,000
Accumulated Depreciation 45,000
Loss on Exchange of Machinery 6,000*
Cash 23,000
Machinery (old) 120,000
*Computation of loss: Book value $ 75,000
Fair value (69,000)
Loss 6,000

 Answer of Exercise 3

2. Susquehanna Corporation
Machinery (new) 92,000
Accumulated Depreciation 50,000
Loss on Exchange of machinery 18,000
Machinery (old) 160,000

Powhatan Company
Machinery (new) ($ 92,000 $ 16,000) 76,000*
Accumulated Depreciation 71,000
Machinery (old) 147,000

*Computation of gain deferred : Fair value $ 92,000

Book value (76,000)
Gain deferred $ 16,000

 Answer of Exercise 3
3. Susquehanna Corporation
Machinery (new) 100,000
Accumulated Depreciation 50,000
Loss on Exchange of machinery 18,000
Machinery (old) 160,000
Cash 8,000

Shawnee Company
Machinery (new) 78,200*
Accumulated Depreciation 75,000
Cash 8,000
Machinery (old) 160,000
Gain on Exchange of Machinery 1,200**

*[$ 92,000 ($ 15,000 $ 1,200)] = $ 78,200

**Computation of Gain: _ $ 8,000 _ x ($ 100,000 $ 85,000) = $ 1,200
$ 8,000 + $ 92,000

 Answer of Exercise 3
4. Susquehanna Corporation
Machinery (new) 185,000
Accumulated Depreciation 50,000
Loss on Exchange of machinery 18,000
Machinery (old) 160,000
Cash 93,000

Seminole Company
Cash 93,000
Used Machine Inventory 92,000
Sales 185,000

Cost of Goods Sold 130,000

Inventory 130,000