Chap 10

E10-7
(a)
 Interest payable on short term loan in 2020 = 1,400,000 × 10% = $140,000
 Interest payable on long term loan in 2020 = 1,000,000 × 11% = $110,000
 Weighted average interest rate
= [(Interest payable on short term loan + Interest payable on long term loan) ÷
(1,400,000 + 1,000,000)] × 100
= [($140,000 + $110,000) ÷ (1,400,000 + 1,000,000)] × 100
= ($250,000 ÷ 2,400,000) × 100 = 10.42%

 Avoidable interest on this project:

= (2,000,000 × 12%) + [(3,600,000 - 2,000,000) × 10.42%]
= 240,000 + 166,720 = $406,720

(b)
 Total capitalization cost = Cost to complete the construction + Avoidable interest
= $5,200,000 + $406,720 = $5,606,720

 Depreciation = (Total capitalization cost - Salvage value) ÷ Estimated life

= ($5,606,720 - $300,000) ÷ 30 = $5,306,720 ÷ 30 = $176,891

E10-9
a)
 Interest revenue = (Issued notes payable - Interest payable) × Short-term
marketable securities × From 1 Aug to 31 Oct ÷ Total number of months in a
year
= ($300,000 - $200,000) × 10% × (3 months ÷ 12)
= $100,000 × 10% × 3/12
= $2,500
 Weighted-average accumulated expenditures = Interest payable × Short-term
marketable securities × From 1 Aug to 31 Oct ÷ Total number of months in a
year
= $200,000 × 3 months ÷ 12
= $50,000
Here we will not consider Nov 1 because it contains 0 month so answer is $50,000
c. Avoidable interest = Weighted-average accumulated expenditures × Notes
payable percentage
= $50,000 × 12%
= $6,000
 Total interest cost to be capitalized = Weighted-average accumulated
expenditures × Notes payable percentage
= $50,000 × 12%
= $6,000

b) Journal entry

Date Account title Debit Credit

31-Jul Cash 400000
Notes payable 400000

Machinery 300000
Debt investments 100000
Cash 400000

Nov-11 Cash 102500

Interest revenue 2500
Debt investments 100000
 Machinery 100000
Cash 100000

Dec-31 Machinery 9000

Interest expense 13400
Cash 2400
Interest payable 20000

E10-11: Journal entry

Account title Debit Credit

a) Equipment $ 10,000
             Accounts Payable $ 10,000
(To record the purchase of equipment on account.)

Account Payables $ 10,000

             Equipment ($10,000 x 2%) $ 200
             Cash $ 9,800
(To record the payment on account.)

(b) Equipment (9,500 + 400) $ 9,900

Loss on Disposal of Equipment* $ 1,600
Accumulated Depreciation $ 6,000
             Accounts Payable $   9,500
             Equipment $   8,000
(To record the purchase of equipment on account.)

Account Payables $   9,500

               Cash $   9,500
(To record the payment on account.)
(c) Equipment (PV(9%,1,0,-10800) $9,908.26
Discount on Note Payable $ 891.74
                 Note Payable $ 10,800
(To record the purchase of equipment with a note.)

Interest Expenses $ 891.74

Notes Payable $ 10,800
       Discount on note payable $ 891.74
        Cash $ 10,800
(To record the payment of the note.)

*
Cost 8,000
Accumulated Depreciation 6,000
Book Value 2,000
Market value 400
Loss 1,600

E10-12

No
Account title and Explanation Debit Credit
.

a. Land 81,000

Grant revenue 81,000

(To record the fair value of land)

b. Buildings 630,000

Land 180,000

Share capital - ordinary (13,000 shares × $50) 650,000

 Share premium - ordinary 160,000

(To record the fair value of land and building)

c. Machinery 40,100

Direct labor 15,000

Factory overhead* 12,600

Materials 12,500

(To record the machinery constructed)

Fixed overhead applied ($15,000 × 60%) $9,000

Additional overhead $2,700

Factory supplies used $900

Total $12,600

E10-13
1.
 Cost of the property, plant and equipment: $12,500 x $168 = $2,100,000
 Allocated cost is based on appraisal values, thus:
$ 400,000
o Land: x $2,100,000 = $350,000
$ 2,400,000
$ 1,2 00,000
o Building: x 2,100,000 = $1,050,000
$ 2,400,000
$ 8 00,000
o Equipment: x 2,100,000 = $700,000
$ 2,400,000
　
Journal entry:
Account titles Debit Credit
Land 350,000
Building 1,050,000
Equipment 700,000
Common stock (12,500 * $100) 1,250,000
Paid-in Capital in Excess of Par - Common 850,000
Stock

2.
Account titles Debit Credit
Building ($105,000 + $161,000) 261,000
Machinery and equipment 135,000
Land improvement 122,000
Land 18,000
Cash 541,000
(To recored cash paid)

3.
Account titles Debit Credit
Machinery and equipment ($260,000 x 98%) 254,800
Cash 254,800
(To recored cash paid)
P10-2

Balance at Balance at
Addition Sale and disposal
beginning 2020 end 2020

Plant facility acquired

from Mendota Company
Land $ 300,000 -portion of fair value $ 485,000
allocated to land:
$ 185,000

Parking lots, streets, and

Land sidewalks:
$ 140,000 $ 235,000
improvements
$ 95,000

Plant facility acquired

from Mendota Company
Buildings $ 1,100,000 - portion of fair value $ 1,655,000
allocated to building
$ 555,000

Invoice price + Freight Machine scrapped

and unloading costs + June 30+ Machine
Sales taxes Installation sold July 1
Equipment $ 960,000 costs (400,000 + 13,000 $ 1,295,000
+ + 20,000 + 26,000) ($ 80,000 + 44,000)

= $ 459,000 = $124,000

b) Items in the fact situation that were not used to determine the answer to (a) above, are
as follows:
1. The tract of land, which was acquired for $150,000 as a potential future building site,
should be included in Lobo’s statement of financial position as an investment in land.
2. The $110,000 and $320,000 book values respective to the land and building carried on
Mendota’s books at the exchange date are not used by Lobo.
3. The $12,000 loss incurred on the scrapping of a machine on June 30, 2020, should be
included in the other income and expense section in Lobo’s income statement. The
$68,000 accumulated depreciation should be deducted from the Accumulated
Depreciation—Machinery and Equipment account in Lobo’s statement of financial
position.
4. The $3,000 loss on sale of a machine on July 1, 2020 should be included in the other
income and expenses section of Lobo’s income statement. The $21,000 accumulated
depreciation should be deducted from the Accumulated Depreciation—Machinery and
Equipment account in Lobo’s statement of financial position.

P10-3