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Chapter 10: Q4BE (page 532)

Use the information for Hanson Company from BE10-2 and BE10-3. Compute avoidable interest for Hanson Company.

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.

Hanson Company borrowed \)1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, \(2,000,000 note payable and an 11%, 4-year, \)3,500,000 note payable

Short Answer

Expert verified

Avoidable Interest: $247,680

Step by step solution

01

Meaning of Avoidable Interest.

Theamount of interest saved in the absence of the projectis known as avoidable interest.The weighted average interest is then multiplied by the interest rate to find the avoidable interest.

02

Computing Avoidable Interest.

Weighted-Average Interest

Interest Rate

Avoidable Interest

$1,000,000 12%

$120,000

1,200,000 10.64%

127,680

$2,200,000

$247,680

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Most popular questions from this chapter

Question: (Classification of Acquisition and Other Asset Costs) At December 31, 2016, certain accounts included in the property, plant, and equipment section of Reagan Company’s balance sheet had the following balances.

Land

\(230,000

Buildings

890,000

Leasehold improvements

660,000

Equipment

875,000

During 2017, the following transactions occurred.

  1. Land site number 621 was acquired for \)850,000. In addition, to acquire the land Reagan paid a \(51,000 commission to a real estate agent. Costs of \)35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for \(13,000.
  2. A second tract of land (site number 622) with a building was acquired for \)420,000. The closing statement indicated that the land value was \(300,000 and the building value was \)120,000. Shortly after acquisition, the building was demolished at a cost of \(41,000. A new building was constructed for \)330,000 plus the following costs.

Excavation fees

\(38,000

Architectural design fees

11,000

Building permit fee

2,500

Imputed interest on funds used

during construction (stock financing)

8,500

The building was completed and occupied on September 30, 2017.

  1. A third tract of land (site number 623) was acquired for \)650,000 and was put on the market for resale.
  2. During December 2017, costs of \(89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2019, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)
  3. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was \)87,000, freight costs were \(3,300, installation costs were \)2,400, and royalty payments for 2017 were $17,500.

Instructions

a, Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Leasehold Improvements

Buildings Equipment

Disregard the related accumulated depreciation accounts.

b, List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan’s financial statements.

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

Marshall Const.

Brigham Mfg. Co.

Fair value of old crane

\( 82,000

Fair value of new crane

\)200,000

Cash paid

118,000

Cash received

118,000

Instructions

  1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
  3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.

(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,

and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) \((275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect’s fee on building 22,000

(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Instructions

Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be

reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Item Land Land Improvements Buildings Other Accounts

(Disposition of Assets) On April 1, 2017, Gloria Estefan Company received a condemnation award of \(430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost \)60,000 and \(280,000, respectively, when they were acquired. At April 1, 2017, the accumulated depreciation relating to the building amounted to \)160,000. On August 1, 2017, Estafan purchased a piece of replacement property for cash. The new land cost \(90,000, and the new building cost \)400,000.

Instructions

Prepare the journal entries to record the transactions on April 1 and August 1, 2017.

(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.
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