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Chapter 10: 2BE (page 502)

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.

Short Answer

Expert verified

$2,200,000

Step by step solution

01

Calculation of interest

InterestonExpenditureofMarch=Expenditure×NumberofMonths=$1,800,000×1012=$1,500,000

InterestonExpenditureofJune=Expenditure×NumberofMonths=$1,200,000×712=$700,000

02

Calculation of cost of land

TotalWeightedAverageExpenditureforInterestCapitalization=InterestonExpenditureofMarch+InterestonExpenditureofJune=$1,500,000+$700,000=$2,200,000

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Most popular questions from this chapter

Question: Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use: (a) It should be excluded completely. (b) It should be included at the same rate as is charged to normal operations.

What are the circumstances or rationale that support or deny the application of these methods?

(Purchase of Equipment with Zero-Interest-Bearing Debt) Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2017, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an \(800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five \)160,000 installments due at the end of each year over the life of the note.

Instructions (Round to nearest dollar in all computations.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
  3. Prepare the journal entry(ies) at the end of the second year to record the payment and interest.
  4. Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

(Treatment of Various Costs) Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company’s fee for title search

\( 520

Architect’s fees

3,170

Cash paid for land and dilapidated building thereon

87,000

Removal of old building \)20,000

Less: Salvage 5,500

14,500

Interest on short-term loans during construction

7,400

Excavation before construction for basement

19,000

Machinery purchased (subject to 2% cash

discount, which was not taken)

55,000

Freight on machinery purchased

1,340

Storage charges on machinery, necessitated

by noncompletion of building when

machinery was delivered

2,180

New building constructed (building

construction took 6 months from date

of purchase of land and old building)

485,000

Assessment by city for drainage project

1,600

Hauling charges for delivery of machinery

from storage to new building

620

Installation of machinery

2,000

Trees, shrubs, and other landscaping

after completion of building

5,400

Instructions

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.

(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.

(Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan—12% interest, payable semiannually, issued December 31, 2016

\)2,000,000

Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2018

1,400,000

Long-term loan—11% interest, payable on January 1 of

each year. Principal payable on January 1, 2021

1,000,000

Instructions

(Carry all computations to two decimal places.)

(A) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of \(5,200,000, and the weighted-average amount of accumulated expenditures was \)3,600,000. Compute the avoidable interest on this project.

(B) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
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