AC 310 Lab Problems Chapter 10

Land
A company purchased land for $75,000 cash. Commissions of $4,500, property taxes of $5,000,
and title insurance of $800 were also incurred. The $5,000 in property taxes includes $4,000 in
back taxes paid by the company on behalf of the seller and $1,000 due for the current year after
the purchase date. For what amount should the company record the land?

Land
A company incurred the following costs associated with the purchase of a piece of land that it
will use to re-build an office building:
       
Purchase price of the land $ 400,000 
Sale of salvaged parts already on the land $ 20,000 
Demolition of the old building $ 30,000  
Ground-breaking ceremony (food and supplies) $ 1,500 
Land preparation and leveling $ 7,500 

What amount should be recorded for the purchase of the land?

Asset Retirement Obligation

On January 1, 2021, Shipley Resources entered into an agreement with the state of Alaska to
obtain the rights to operate a mineral mine for $6 million. As part of the agreement, Shipley
agrees to restore the land to its original condition after mining operations are completed in
approximately five years. Management has provided the following possible outflows for the
restoration costs that will occur five years from now:
Cash Outflow   Probability
$ 300,000      25%  
  400,000      50%  
  500,000      25%  

Shipley's credit-adjusted risk-free interest rate is 10%.

What is the amount capitalized as the cost of the mine on January 1, 2021?
AC 310 Lab Problems Chapter 10

Goodwill
Northern purchased the entire business of Southern including all its assets and liabilities for $600,000 on
December 31, 2021. Below is information related to the two companies at that date:

  Northern   Southern  
Fair value of assets $ 1,050,000     $ 800,000    
Fair value of liabilities   575,000       300,000    
Reported assets   800,000       650,000    
Reported liabilities   500,000       250,000    
Net Income for the year   60,000       50,000    

How much goodwill did Northern pay for acquiring Southern?

Exchange
MD Corporation recently acquired new equipment to be used in its production process. In
exchange, the company traded an existing machine that had an original cost of $60,000. The fair
value of the old equipment is $17,000 even though the current book value is $15,000. In
addition, MD paid $40,000 cash to the equipment manufacturer.

a. Record the transaction assuming the exchange has commercial substance

b. Record the transaction assuming the exchange does not have commercial substance.
c. Record the transaction assuming the fair value of the equipment is $10,000.

Interest Capitalization
A company constructs a building for its own use. Construction began on January 1 and ended on
December 30. The expenditures were as follows:
January 1: $500,000
March 31: $600,000
June 30: $400,000
October 30: $600,000

The company has a construction loan of $700,000 at 7% starting on January 1. Other debt
outstanding for the entire year was a $3,000,000 line of credit at 8% and a $5,000,000 loan at
6%. If the company uses the specific interest method, what is the amount of interest capitalized
for the year?