Exercise ( Chapter 1 )

I. Short exercise
1. CMH tools purchased an industrial lathe to be used in its manufacturing process .
-The purchase price was $62,000 .
-Company paid a freight company $1,000 to transport the machine to its plant location plus $300 shipping insurance. In
addition the machine had to installed and mount a special platform built specifically for the machine at a cost of $1,200.
After installation , several trial runs were made to insure proper operation . The cost of theses trials including wasted
material was $600 . At what amount should Company capitalize the lathe ?

2. Ros mond Manufacturing purchased land next to its factory to be used as parking lot . Expenditures incurred by the
company were as follows:
- Purchases price , $ 75,000.
- Broker fee , $6,000
- Title search and other fees , $550
- Demolition of shack on the property , $2,000
- General grading of property , $1,050
- Paving for parking lot , $10,000
- Lighting for parking lot , $8,000
- Signs for parking lot , $1,600
Required : Determine the amount should be debit to the land account and Land improvement account .

3. Ellen Briggs purchased a car wash for $240,000. If purchased separately , the land would have cost $60,000, the
building $135,000, and the equipment $105,000. Determine the amount that should be recorded in the new business’s
record for Land , Building , and Equipment .

4. Jackson purchased a used tractor for $17,500 . before the tractor could be used , it required new tires, which cost
$1,100 and an overhaul which cost $1,400 . Its first tank of fuel cost $75 . The tractor is expect to last six years and have
a residual value of $2,000 . Determine the cost and depreciable cost of the tractor and calculate the first year ‘s
depreciation under straight line method .

5. A piece of equipment that cost $31,400 , on which $18,000 of accumulated depreciation had been record was disposed
of on January 2nd , the first day of business of the current year .Give journal entries to record the disposal under each of
the following assumptions .
1. It was discard or having no value .
2. It was sold for $6,000 cash .
3. It was sold for $18,000 cash.
4. It was trade-in on dissimilar equipment having a list price of $48,000 . A $15,600 trade-in was allowed ,
and the balance was paid in cash . Gains and losses are to be recognized .
5. It was trade-in on dissimilar equipment having a list price of $48,000 . A $7,200 trade in was allowed ,
and the balance was paid in cash . Gains and losses are to be recognized .

6. On January 1st ,2009 , the Mills Conveying equipment Company began construction of a building to be used as its
office headquarter . The building was completed on June 30 , 2010 . Expenditure on the project , mainly payments to
subcontractors, were as follow :
January 3,2009 …………………………………………… $500,000
March 31 ,2009 ……………………………………………. 400,000
September 30 , 2009 ………………………………………… 600,000
Accumulated expenditures at December 31,2009
( before interest capitalization ) ………………….. $1,500,000
January 31, 2010 …………………………………………. 600,000
April 30 , 2010 …………………………………………… 300,000
On January 2, 2009 , the company obtained a $1million construction loan with 8% interest rate .
The loan was outstanding during the entire construction period . The company’s other interest bearing debt included
two long term notes of $2,000,000 and $4,000,000 with interest rate of 6% and 12% , respectively . Both notes were
outstanding during the entire construction period .
Required : Calculated the amount of interest to be capitalized

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II. Skill development exercise
1.Moline computers, Inc constructed a new training center in 2006 . you have been hired to manage the training center .
A review of accounting records list the following expenditures debit to the training center account .
Attorney’s fee , land acquisition ………………………..$ 17,450
Cost of land ……………………………………………. 299,000
Architect’s fee ,building design………………………… 51,000
Contractors cost ,building ……………………………… 510,000
Contractor’s cost, parking lot and sidewalk …………… 67,800
Electrical wiring ,building …………………………….. 82,000
Landscaping …………………………………………… 27,500
Cost of surveying land ………………………………… 4,600
Training , equipment ,table and chair………………….. 68,200
Contractor ‘s cost , installing training equipment……… 34,000
Cost of grading the land ……………………………….. 7,000
Cost of changes in building to soundproof rooms……… 29,600
Total account balance $1,198,150
During the center construction , someone for Moline Computer Inc. worked full time on the project .She spent two
month for the purchases and preparation of the site , six month on the construction , one month on land
improvements ,and one month on equipment installation and training room furniture purchase and set up . Her salary of
$32,000 during this ten month period was charged to administrative expense . the center was place in operation on
November 1st .
Required : 1. Prepare the schedule with the following four column (account) headings: Land, Land improvements,
Building ,and Furniture and Equipment .Place each item in the appropriate column . total the columns.
2. Prepare an entry on December 31 to correct the accounts associated with the training center , assuming
that the company’s account have not yet been closed at the end of the year .
2. Consider each of the transactions below. All of the expenditures were made in cash.
1. The Edison Company spent $12,000 during the year for experimental purposes in connection with the
development of a new product.
2. In April, the Marshall Company lost a patent infringement suit and paid the plaintiff $7,500.
3. In March, the Cleanway Laundromat bought equipment on an installment note. The contract price was
$24,000, payable $6,000 down, and $2,000 a month for the next nine months. The cash price for this equipment was
$23,000.
4. On June 1, the Jamsen Corporation installed a sprinkler system throughout the building at a cost of $28,000.
5. The Mayer Company, plaintiff, paid $12,000 in legal fees in November, in connection with a successful
infringement suit on its patent.
6. The Johnson Company traded its old machine with an original cost of $7,400 and a net book value of $3,000
plus cash of $8,000 for a new one that had a fair value of $10,000.
Required: Prepare journal entries to record each of the above transactions.
3.Nonmonetary exchange for dissimilar assets :
Southern Company owns a building that it leases. The building’s fair value is $1,400,000 and its book value is $800,000
(original cost of $2,000,000 less accumulated depreciation of $1,200,000). Southern exchanges this for another building
owned by the Eastern Company. The building’s book value on Eastern’s books is $950,000 (original cost of $1,600,000
less accumulated depreciation of $650,000). Eastern also gives Southern $140,000 to complete the exchange.
Required:
Prepare the journal entries to record the exchange on the books of both Southern and Eastern assuming that the buildings
are considered to be similar assets by both companies.
4. On January 1, 2010, the Mason Manufacturing Company began construction of a building to be used as its office
headquarters. The building was completed on September 30, 2011.
Expenditures on the project were as follows:
January 3, 2010 .................$1,000,000
March 1, 2010...................... 600,000
June 30, 2010....................... 800,000
October 1, 2010................... 600,000
January 31, 2011................. 270,000
April 30, 2011..................... 585,000
August 31, 2011.................. 900,000

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On January 2, 2010, the company obtained a $3 million construction loan with a 10% interest rate. The loan was
outstanding all of 2010 and 2011. The company’s other interest-bearing debt included two long-term notes of $4,000,000
and $6,000,000 with interest rates of 6% and 8%, respectively. Both notes were outstanding during all of 2010 and 2011.
The company’s fiscal year-end is December 31.
Required:
1. Calculate the amount of interest that Mason should capitalize in 2010 and 2011 .
2. What is the total cost of the building?
3. Calculate the amount of interest expense that will appear on the 2010 and 2011 income statements.