Chapter 10: Q5Q (page 502)
Question: When should debt security be classified as held-to-maturity?
Answer:
When an investor can hold it till the maturity of the security, it is classified as held-to-maturity.
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(Entries for Acquisition of Assets) Presented below is information related to Zonker Company.
1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:
Land | \( 400,000 |
Buildings | 1,200,000 |
Equipment | 800,000 |
Total | \)2,400,000 |
Zonker Company gave 12,500 shares of its \(100 par value common stock in exchange. The stock had a market price of \)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 | \(105,000 |
Construction of bases for equipment to be installed later | 135,000 |
Driveways and parking lots | 122,000 |
Remodeling of office space in building, including new partitions and walls | 161,000 |
Special assessment by city on land | 18,000 |
3. On December 20, the company paid cash for equipment, \)260,000, subject to a 2% cash discount, and freight on equipment of $10,500.
Instructions
Prepare entries on the books of Zonker Company for these transactions.
Question: Provide examples of assets that do not qualify for interest capitalization
Question: Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney’s fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.
(Capitalization of Interest) On December 31, 2016, Main Inc. borrowed \(3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, \)360,000; June 1, \(600,000; July 1, \)1,500,000; December 1, \(1,500,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding
10-year, 13% bond, December 31, 2010, interest payable annually \)4,000,000
6-year, 10% note, dated December 31, 2014, interest payable
annually \(1,600,000
2. March 1, 2017, expenditure included land costs of \)150,000
3. Interest revenue earned in 2017 $49,000
Instructions
(a) Determine the amount of interest to be capitalized in 2017 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 at December 31, 2017.
Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.
Instructions
If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
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