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Chapter 10: Q9Q (page 531)

Question: Provide examples of assets that do not qualify for interest capitalization

Short Answer

Expert verified

Answer

Examples of assets do not qualify for interest capitalization:

  1. Assets which are not ready for use
  2. Assets which are not use in earning activities

Step by step solution

01

Assets which are not ready for use

Interest is not capitalizing on those assets which are purchased by the company but still not available for the production purposes. These assets are considered as the unavailable for use.

02

Assets which are not use in earning activities

Assets which are purchased by the company but not engage in the earning activities are also not consider for the interest capitalization. Assets which are not go through the activities necessary to convert the assets from unavailable to available are also not consider for interest capitalization.

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Most popular questions from this chapter

(Nonmonetary Exchanges) You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Client A

Client B

Original cost

\(100,000

\)150,000

Accumulated depreciation

40,000

80,000

Fair value

80,000

100,000

Cash received (paid)

(20,000)

20,000

Instructions

  1. Record the trade-in on Client A’s books assuming the exchange has commercial substance.
  2. Record the trade-in on Client A’s books assuming the exchange lacks commercial substance.
  3. Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
  4. Record the entry on Client B’s books assuming the exchange has commercial substance.
  5. Record the entry on Client B’s books assuming the exchange lacks commercial substance.
  6. Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

(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.

(Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde’s asset is referred to below as “Asset A,” and Wiggins’ is referred to as “Asset B.” The following facts pertain to these assets.

Asset A

Asset B

Original cost

\(96,000

\)110,000

Accumulated depreciation (to date of exchange)

40,000

47,000

Fair value at date of exchange

60,000

75,000

Cash paid by Hyde, Inc.

15,000

Cash received by Wiggins, Inc.

15,000

Instructions

  1. Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
  2. Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres’s assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

350,000

Equipment

300,000

300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

  1. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

  1. Kim Company purchased office equipment for \)20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

  1. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.
  2. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.
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