BE10.

3 (LO2)
Zhang Ltd. borrowed HK$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, HK$2,000,000 note payable and an 11%, 4-year, HK$3,500,000 note payable.
Compute the capitalization rate used for interest capitalization purposes.

ANSWER
5-year note HK$2,000,000
10% x 2,000,000 = 200,000
4-year note HK$3,500,000
11% x 3,500,000 = 385,000
- Capitalization rate used for interest capitalization purposes:
200,000+385,000
=10.64 %
2,000,000+3,500,000

BE10.10 (LO3)
Mehta SE traded a used welding machine (cost €9,000, accumulated depreciation €3,000)
for office equipment with an estimated fair value of €5,000. Mehta also paid €3,000 cash
in the transaction. Prepare the journal entry to record the exchange. (The exchange has
commercial substance.)

ANSWER
Loss on Disposal of Equipment = €9,000 - €3,000 - €5,000 + €3,000
Journal entry:
Office Equipment €5,000
Accumulated Depreciation – Welding Machine 3,000
Loss on Disposal of Equipment 4,000
Welding Machine €9,000
Cash 3,000

E10.3 (LO1)
(Acquisition Costs of Trucks) Haddad Corporation operates a retail computer store. To
improve delivery services to customers, the company purchases four new trucks on April
1, 2019. The terms of acquisition for each truck are described below.
1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.
2. Truck #2 has a list price of $20,000 and is acquired for a down payment of
$2,000 cash and a zero- interest-bearing note with a face amount of $18,000.
The note is due April 1, 2020. Haddad would normally have to pay interest at a rate of
10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer
system that Haddad carries in inventory. The computer system cost $12,000
and is normally sold by Haddad for $15,200. Haddad uses a perpetual inventory system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000
ordinary shares in Haddad Corporation. The shares have a par value per share
of $10 and a market price of $13 per share.
Instructions
Prepare the appropriate journal entries for the foregoing transactions for Haddad
Corporation. (Round computations to the nearest dollar.)

ANSWER
1.
Truck #1 $13,900
Cash $13,900
2. PV = $18,000 x 0.90909 = $16,364
Truck #2 18,364
Cash 2,000
Notes Payable 16,364
3.
Truck #3 15,200
Cost of Goods Sold 12,000
Inventory 12,000
Sales 15,200
4.
Truck #4 13,000
Share Capital 10,000
Share Premium 3,000

E10.7 (LO2)
(Capitalization of Interest) McPherson Furniture started construction of
a combination office and warehouse building for its own use at an estimated cost of
€5,000,000 on January 1, 2019. McPherson expected to complete the building by
December 31, 2019. McPherson has the following debt obligations outstanding during
the construction period.
 Construction loan—12% interest, payable semiannually, issued €2,000,000
December 31, 2018
Short-term loan—10% interest, payable monthly, and principal payable 1,600,000
at maturity on May 30, 2020
Long-term loan—11% interest, payable on January 1 of each year. 1,000,000
Principal payable on January 1, 2023

Instructions
(Carry all computations to two decimal places.)
a. Assume that McPherson completed the office and warehouse building on December
31, 2019, as planned at a total cost of €5,200,000, and the weighted-average accumulated
expenditures was €3,800,000. Compute the avoidable interest on this project.
b. Compute the depreciation expense for the year ended December 31, 2020. McPherson
elected to depreciate the building on a straight-line basis and determined that the asset has
a useful life of 30 years and a residual value of €300,000.

ANSWER
a.
● Short-term loan
10% x 1,600,000 = 160,000
● Long-term loan
11% x 1,000,000 = 110,000
- Capitalization rate:
160,000+110,000
=10.38 %
2,600,000+1,000,000
Avoidable Interest:
2,000,000 x 12% + 1,800,000 x 10.38% = €426,840
b.
Actual Interest:
12% x 2,000,000 + 10% x 1,600,000 + 11% x 1,000,000 = €510,000 (>€426,840)
Total Cost of Construction:
5,200,000 + 426,840 = €5,626,840
Depreciation Expense for the Year Ended December 31, 2020:
5,626,840−300,000
=€ 177,561
30
E10.8 (LO2)
(Capitalization of Interest) On December 31, 2018, Tsang Group borrowed
HK$3,000,000 at 12% payable annually to finance the construction of a new building. In
2019, the company made the following expenditures related to this building: March 1,
HK$360,000; June 1, HK$600,000; July 1, HK$1,500,000; and December 1,
HK$1,200,000. Additional information is provided as follows.

1. Other debt outstanding

10-year, 11% bond, December 31, 2012, interest payable HK$4,000,000
annually
6-year, 10% note, dated December 31, 2016, interest payable HK$1,600,000
annually
2. March 1, 2019, expenditure included land costs of HK$150,000
3. Interest revenue earned in 2019 on funds related to specific HK$49,000
borrowing

Instructions
a. Determine the amount of interest to be capitalized in 2019 in relation to the
construction of the building.
b. Prepare the journal entry to record the capitalization of interest and the recognition of
interest expense, if any, at December 31, 2019.
ANSWER
a.
Actual Interest = 3,000,000 x 12% + 4,000,000 x 11% + 1,600,000 x 10%
= HK$960,000
Capitalization Weighted-Average
Period Accumulated Expenditures
March 1 HK$360,000 10/12 HK$300,000

June 1 600,000 7/12 350,000

July 1 1,500,000 6/12 750,000
December 1 1,200,000 1/12 100,000
1,500,000
Avoidable Interest = 1,500,000 x 12% = HK$180,000

-> Amount of Interest to be Capitalized = 180,000 - 49,000 = HK$131,000

b.
Building HK$ 131,000
Interest expense (960,000 - 131,000) 829,000
Cash HK$960,000

E10.18 (LO3) (Non-Monetary Exchange)

Montgomery Ltd. purchased an electric
wax melter on April 30, 2020, by trading in its old gas model and paying the balance
in cash. The following data relate to the purchase.

List price of new melter £15,800

Cash paid 10,000
Cost of old melter (5-year life, £700 residual value) 12,700
Accumulated depreciation (old melter—straight-line) 7,200
Fair value of old melter 5,200

ANSWER
Instructions
Prepare the journal entry(ies) necessary to record this exchange, assuming that the
exchange (a) has commercial substance, and (b) lacks commercial substance.
Montgomery's year ends on December 31, and depreciation has been recorded
through December 31, 2019.
12,700−700
Depreciation Expense = x 4/12 = 800
5
Depreciation Expense £800
Accumulated Depreciation £800
a.
Book value = 12,700 - 8,000 = 4,700
Gain on Disposal = 5,200 - 4,700 = 500
Cost of new asset = 10,000 + 5,200 = 15,200

Electric Wax Melter 15,200

Accumulated Depreciation - Gas Melter 8,000
Gain on Disposal 500
Gas Melter 12,700
Cash 10,000

b.
Electric Wax Melter (15,200 - 500) 14,700
Accumulated Depreciation - Gas Melter 8,000
Gas Melter 12,700
Cash 10,000

E10.24 (LO4) (Analysis of Subsequent Expenditures)

The following transactions occurred during 2020. Assume that depreciation of 10% per
year is charged on all machinery and 5% per year on buildings, on a straight-line basis,
with no estimated residual value. Depreciation is charged for a full year on all fixed
assets acquired during the year, and no depreciation is charged on fixed assets disposed
of during the year.

Jan. A building that cost $112,000 in 2003 is torn down to make room for a new
30 building. The wrecking contractor was paid $5,100 and was permitted to keep
all materials salvaged.
Mar. Machinery that was purchased in 2013 for $16,000 is sold for $2,900 cash,
10 f.o.b. purchaser's plant. Freight of $300 is paid on the sale of this machinery.
Mar. A gear breaks on a machine that cost $9,000 in 2015. The gear is replaced at
20 a cost of $3,000. The replacement does not extend the useful life of the
machine.
May A special base installed for a machine in 2014 when the machine was
18 purchased has to be replaced at a cost of $5,500 because of defective
workmanship on the original base. The cost of the machinery was $14,200 in
2014. The cost of the base was $4,000, and this amount was charged to the
Machinery account in 2014.
June One of the buildings is repainted at a cost of $6,900. It had not been painted
23 since it was constructed in 2016.
Instructions
Prepare general journal entries for the transactions. (Round to the nearest dollar.)
 ANSWER

Jan. Accumulated Depreciation - Building $95,200

30 (112,000 x 5% x 17)
Loss on Disposal 21,900
(112,000 – 95,200 + 5,100)
Building $112,000
Cash 5,100
Mar. Cash (2,900 - 300) 2,600
10 Accumulated Depreciation - Machinery
(16,000 x 70%) 11,200
Loss on Disposal 2,200
(16,000 - 11,200 + 300 - 2,900)
Machinery 16,000
Mar. Machinery 3,000
20 Cash 3,000
May Machinery 5,500
18 Accumulated Depreciation - Machinery 2,400
(4,000 x 60%)
Loss on Disposal (4,000 - 2,400) 2,200
Machinery 4,000
Cash 5,500
June Repair expense 6,900
23 Cash 6,900