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Chapter 10: Q6Q (page 530)

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

Short Answer

Expert verified

Answer

Agree with the architect fees and interest and taxes. Disagree with the promotion expenses and interest revenue on investment as these are recoded as the expense and revenue respectively

Step by step solution

01

Organization and promotion expenses

Disagree with organization and promotion expenses as this cost did not include in the cost of building this cost shown as the operating expense in the income statement of the company

02

Architect fees

Architect fees is the professional fess paid by the company to the architect. So, it is included in the cost of building. So, agree with the architect fees.

03

Interest and taxes paid during construction of building

Interest and taxes cost incurred for the construction of building is consider as the overhead costa and included in the building cost. So, also agree with interest and taxes paid for the construction of building.

04

Interest revenue on investment

Interest revenue generated from the investment held for the purpose of the building construction is not included in the cost building. As this cost is shown in the revenues head of the income statement. Disagree with the interest revenue from investment.

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Most popular questions from this chapter

(Capitalization of Interest) Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2012. Laserwords’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.

On June 1, 2017, Laserwords contracted with Black Construction to have a new building constructed for \(4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.

Date

Amount

July 30, 2017

\) 900,000

January 30, 2018

1,500,000

May 30, 2018

1,600,000

Total payments

\(4,000,000

Construction was completed and the building was ready for occupancy on May 27, 2018. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year

10%, 5-year note payable of \)2,000,000, dated April 1, 2014, with interest payable annually on April 1.

12%, 10-year bond issue of $3,000,000 sold at par on June 30, 2010, with interest payable annually on June 30.

The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.

Instructions

  1. Compute the weighted-average accumulated expenditures on Laserwords’ new building during the capitalization period.
  2. Compute the avoidable interest on Laserwords’ new building. (Round to one decimal place.)
  3. Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2018.
    1. Identify the items relating to interest costs that must be disclosed in Laserwords’ financial statements.
    2. Compute the amount of each of the items that must be disclosed.

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

(Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2016, had the following balances.

Land

\( 300,000

Land improvements

140,000

Buildings

1,100,000

Equipment

960,000

During 2017, the following transactions occurred.

  1. A tract of land was acquired for \)150,000 as a potential future building site.
  2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of \(37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at \)110,000 for land and \(320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are \)230,000 and \(690,000.
  3. Items of machinery and equipment were purchased at a total cost of \)400,000. Additional costs were incurred as follows.

Freight and unloading

\(13,000

Sales taxes

20,000

Installation

26,000

  1. Expenditures totaling \)95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
  2. A machine costing \(80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has been recorded on the basis of a 10-year life.
  3. A machine was sold for \)20,000 on July 1, 2017. Original cost of the machine was \(44,000 on January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of \)2,000.

Instructions

(Round to the nearest dollar.)

a. Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Buildings

Land Improvements Equipment

(Hint: Disregard the related accumulated depreciation accounts.)

b. List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.

Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson’s weighted-average accumulated expenditures for interest capitalization purposes.
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