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Chapter 10: Q6Q (page 530)

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

Short Answer

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Answer

Agree with the architect fees and interest and taxes. Disagree with the promotion expenses and interest revenue on investment as these are recoded as the expense and revenue respectively

Step by step solution

01

Organization and promotion expenses

Disagree with organization and promotion expenses as this cost did not include in the cost of building this cost shown as the operating expense in the income statement of the company

02

Architect fees

Architect fees is the professional fess paid by the company to the architect. So, it is included in the cost of building. So, agree with the architect fees.

03

Interest and taxes paid during construction of building

Interest and taxes cost incurred for the construction of building is consider as the overhead costa and included in the building cost. So, also agree with interest and taxes paid for the construction of building.

04

Interest revenue on investment

Interest revenue generated from the investment held for the purpose of the building construction is not included in the cost building. As this cost is shown in the revenues head of the income statement. Disagree with the interest revenue from investment.

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Most popular questions from this chapter

(Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.

The Land and Buildings account reported the following items during 2018.

January 31

Land and buildings

\(160,000

February 28

Cost of removal of building

9,800

May 1

Partial payment of new construction

60,000

May 1

Legal fees paid

3,770

June 1

Second payment on new construction

40,000

June 1

Insurance premium

2,280

June 1

Special tax assessment

4,000

June 30

General expenses

36,300

July 1

Final payment on new construction

30,000

December 31

Asset write-up

53,800

399,950

December 31

Depreciation—2018 at 1%

(4,000)

December 31, 2018

Account balance

\)395,950

The following additional information is to be considered.

1. To acquire land and building, the company paid \(80,000 cash and 800 shares of its 8% cumulative preferred stock, par value \)100 per share. Fair value of the stock is \(117 per share.

2. Cost of removal of old buildings amounted to \)9,800, and the demolition company retained all materials of the building.

3. Legal fees covered the following.

Cost of organization
\( 610
Examination of title covering purchase of land
1,300
Legal work in connection with construction contract
1,860

\)3,770

4. Insurance premium covered the building for a 2-year term beginning May 1, 2018.

5. The special tax assessment covered street improvements that are permanent in nature.

6. General expenses covered the following for the period from January 2, 2018, to June 30, 2018.

President’s salary
\(32,100
Plant superintendent’s salary—supervision of new building

4,200

\)36,300


7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building \(53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8.Estimated life of building—50 years. Depreciation for 2018—1% of asset value (1% of \)400,000, or $4,000).

Instructions

  1. Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2018.
  2. Show the proper presentation of land, buildings, and depreciation on the balance sheet at December 31, 2018.

Crowe Company purchased a heavy-duty truck on July 1, 2014, for \(30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of \)6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing \(42,000; \)16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance. What is the entry to record the trade-in?

(Capitalization of Interest) On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a \(300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. \)200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final \(100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2017, is a \)30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Instructions

(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

(1) July 31, 2017.

(2) November 1, 2017.

(3) December 31, 2017.

Question: Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.

Question: What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?
See all solutions

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