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CHAPTER 9

PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION AND DISPOSAL

CONTENT ANALYSIS OF EXERCISES AND PROBLEMS

Time Range
Number Content (minutes)

E9-1 Determination of Cost. Analysis of numerous items 5-10


to determine whether or not to include in property,
plant, and equipment.

E9-2 Property, Plant, and Equipment. Analysis of various 5-10


items for potential balance sheet inclusion.

E9-3Acquisition Costs. Compute total acquisition costs 5-10


of machine and prepare journal entry to record.

E9-4 Acquisition Cost. Journal entry to record acquisition. 5-15


Analysis of entry if price not available.

E9-5 (AICPA adapted). Acquisition Cost. Determination 5-15


of cost and journal entry to record acquisition.

E9-6 (AICPA adapted). Acquisition of Land and Building. 10-15


Computation of land and new building cost.

E9-7 Lump Sum Purchase. Cost assigned to land, buildings, 10-15


and equipment.

E9-8 Exchange of Assets. No boot, similar productive 10-15


assets. Journal entries.

E9-9 Exchange of Assets. Boot, similar productive assets, 10-15


loss. Journal entries.

E9-10 Exchange of Assets. Boot, similar productive assets, 10-15


gain. Journal entries.

E9-11 Exchange of Assets. No boot, dissimilar productive 10-15


assets. Journal entries.

E9-12 Exchange of Assets. Boot, dissimilar productive 10-15


assets. Journal entries.

E9-13 (AICPA adapted). Exchange of Assets. No boot, 5-10


similar productive assets. Determination of

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amount to be shown in the accounting records.
Time Range
Number Content (minutes)

E9-14 Self-Construction. Determination of amount to be 10-15


capitalized. Evaluation under differing outside
contractor's bids.

E9-15 Donation. Journal entry to record acquisition. 10-20


Financial statement disclosure. Time differences
for passage of title.

E9-16 Interest During Construction. Compilation of amount 5-15


to be capitalized. Financial statement disclosure.

E9-17 Interest During Construction. Compute amount of 5-15


capitalized interest and interest revenue.

E9-18 Expenditures. Capital vs. operating. Classification 5-10


of various items.

E9-19 (Appendix). Oil and Gas Accounting. Successful 10-20


efforts, full-cost methods. Determination of
expense and balance sheet value.

P9-1 Acquisition Costs. Reclassification of erroneously 20-30


recorded items. Journal entries.

P9-2 Costs Subsequent to Acquisition. Adjusting entries 45-60


to correct the books from improperly recorded costs.
Acquisition, legal fees, insurance, additions, repairs.

P9-3 Cost Classification. Journal entries to record 25-35


various transactions. Acquisition, parking lot,
sale, lease, freight, installation, taxes.

P9-4 (CMA adapted). Self-Construction. Computation 30-45


according to GAAP of amount to be capitalized.
Identification of any alternative procedures.

P9-5 Acquisition Cost. Acquisition, replacement, 20-30


purchase. Journal entries to record various
transactions.

P9-6 (AICPA adapted). Comprehensive: Analysis of 25-35


Changes in Fixed Assets. Preparation of schedules
for changes in land, building, leasehold improvements,
and machinery and equipment.

P9-7 Assets Acquired by Exchange. Various situations 40-60


dealing with similar or dissimilar productive
assets and boot. Journal entries.

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Time Range
Number Content (minutes)

P9-8 Assets Acquired by Exchange. Various situations 30-45


dealing with similar or dissimilar productive assets,
boot, and changing fair value. Journal entries.

P9-9 Interest During Construction. Computation of amount 20-30


to be capitalized and amount to be depreciated.
Straight-line. Effects on financial statements.

P9-10 Comprehensive: Interest Capitalization. Computation 40-60


of amounts of capitalized interest, interest expense,
and interest revenue. Journal entries to record
construction costs, including interest.

P9-11 Events Subsequent to Acquisition. Replacement, 20-30


repairs, demolition. Journal entries to record
various transactions.

P9-12 (AICPA adapted). Comprehensive: Adjusting Entries. 40-60


Analysis of machinery and equipment account. Schedules
to show effect of additions and retirements on
account balances. Journal entries.

P9-13 (AICPA adapted). Adjusting Entries. Analysis of 40-60


the building account. Journal entries to adjust
the account as necessary. Supporting computations.

P9-14(Appendix). Oil and Gas Accounting. Successful 10-20


efforts, full-cost methods. Financial statement
disclosure.

ANSWERS TO QUESTIONS

Q9-1For a company to include an asset in the category of property, plant, and equipment, the asset must: (1) be held for use in the normal
course of business; (2) have an expected useful life of more than one year; and (3) be tangible property - that is, the asset
must have physical substance.

Q9-2Generally, a company capitalizes the expenditures that are necessary to obtain the benefits to be derived from the asset and includes
them as a cost of property, plant, and equipment. The expenditures include the costs incurred in the acquisition of an asset
and in putting the asset into operating condition. The company expenses the costs of maintaining the benefits at the levels
originally expected.

Q9-3A company classifies land held for investment on the balance sheet as an investment. It does not include the land as property, plant,
and equipment, since it is not being used in the normal course of business in a productive capacity.

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Q9-4The book value of an asset is the recorded acquisition cost less the accumulated depreciation recorded to date.

Q9-5At the date of acquisition, the acquisition cost is equal to the market value. At the end of the life of the asset, the book value should
equal the residual value (a market value). During the life of the asset, there is no defined relationship between the book
value and market value because depreciation is a process of cost allocation, not of market valuation.

Q9-6In a lump-sum purchase, the company allocates the total purchase price to the individual assets on the basis of their relative fair
values. This allocation is necessary because some of the assets may have different economic lives, may not be
depreciable, or may be depreciated by different methods.

Q9-7When a company exchanges securities for an asset, the acquisition cost of that asset is either the fair value of the securities given up
or the fair value of the asset acquired. The company makes the choice on the basis of the market that is more reliable. If
neither of these amounts is known, it may use an appraisal of the asset, or, as a final solution, the company's board of
directors may place a value on the transaction.

Q9-8The distinction between similar and dissimilar productive assets is that similar productive assets are of the same general type and
perform the same basic function and are used in the same line of business. This distinction is made because, in the
exchange of similar productive assets, the earning process is not considered completed, and thus the accounting for the
transaction is different than when dissimilar productive assets are exchanged.

Q9-9When similar productive assets are exchanged, the company recognizes a gain to the extent that it receives "boot" along with the
asset. The company recognizes a loss in accordance with the conservatism principle of accounting.

When dissimilar productive assets are exchanged, the earning process is considered completed and the company recognizes both gains
and losses.

Q9-10The term "boot" refers to monetary consideration either paid or received. For the special rules to apply, the boot must be less than
25% of the fair value of the transaction.

Q9-11The general principle underlying accounting for dissimilar productive assets is that the earning process has been completed and thus
gains or losses are recognized. On the other hand, in accounting for similar productive assets the earning process has not
been completed. The company is in the same relative position, so gains on the exchange is deferred (except to the extent
that boot is received). Losses are recognized in accordance with the conservatism principle.

Q9-12According to the provisions of FASB Statement No. 34, a company capitalizes interest on the acquisition of an asset if the asset
requires a period of time to get it ready for its intended use - a criterion that is met for the self-construction of an asset.
Specifically, the company does not capitalize interest for the following types of assets:

1.Inventories that are routinely manufactured or otherwise produced on a repetitive basis.

2.Assets that are in use or ready for their intended use.


3.Assets that are not being used in the earning activities of the company and are not undergoing the activities necessary to
get them ready for use.

Since imputed interest is not capitalized, the company must have borrowed funds to finance the self-construction of the asset.

In contrast, interest on a note payable (that is not associated with the construction of an asset) is expensed as incurred.

Q9-13A company bases the amount of interest capitalized for a self-constructed asset on the actual amounts borrowed and the cost of
those borrowings. The amount is intended to be that portion of the interest cost incurred during the asset's construction
period that theoretically could have been avoided. The company determines the amount that it capitalizes by applying an
interest rate to the average amount of the expenditures on the self-constructed asset during the capitalization period.

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Q9-14Since activities that are necessary to get the asset ready for its intended use are in progress, the asset qualifies for interest
capitalization. The company capitalizes interest to the building account unless it makes specific expenditures that are
normally added to the land account, as discussed at the beginning of this chapter.

Q9-15Three alternative treatments of fixed overhead costs are (1) to allocate a portion of the total fixed overhead to the cost of the asset
being constructed, (2) to include only the incremental fixed overhead that is attributable to construction in the cost of the
self-constructed asset, or (3) to include no fixed overhead in the cost of the self-constructed asset. Proponents of the
allocation of total overhead argue that construction should be treated the same as any other production process that
receives a portion of overhead costs. This method is appropriate when the company is operating at full capacity and
regular production is reduced by the self-construction. Arguments in favor of including only the incremental increase are
that normal production costs should include the same amount of overhead whether construction is going on or not, the
normal overhead would be incurred anyway, and that the cost of an asset and the decision to construct it should be based
on additional and incremental costs incurred. This method is appropriate when the company is in an excess capacity
situation. The argument in favor of including no fixed overhead is that the fixed overhead does not change as a result of
the construction. Therefore, to include some overhead would result in less overhead being expensed in the current period,
and an increase in income.
Q9-16Under generally accepted accounting principles, a company may not recognize profit on the self-construction of an asset. The
revenue recognition principle allows recognition of profit on asset use and disposal, not on the acquisition or construction of
an asset. If construction costs are materially greater than the fair value of the asset, then the convention of conservatism
requires the company to write-down the capitalized costs and recognize a loss.

Q9-17The distinction between a capital expenditure and an operating expenditure is whether the costs have increased the future economic
benefits of the asset above those that were originally expected. The future economic benefits can be increased by
extending the life of the asset, improving productivity, producing the same product at a lower cost, or increasing the quality
of the product. For example, if a machine receives a major overhaul that increases the benefits to be realized from the
asset, the costs are capitalized. Conversely, ordinary repairs are of a maintenance type that do not increase the total
benefits to be realized, and, therefore, are expensed. As another example, the cost of adding a new wing to an existing
hospital is capitalized since it increases the total benefits of the hospital, whereas repairing the elevators does not increase
the economic benefit of the hospital and so is expensed.

Q9-18An addition is a new asset that is being "added" or utilized in conjunction with an old asset. In contrast, an improvement/ replacement
involves the substitution of a new part or asset for an old one. In accounting for an addition, a company capitalizes the
costs of the addition, and takes out of the old asset account any portion of the old asset that is demolished or removed. A
company capitalizes improvement and replacement costs using the substitution method when it knows the book value of
the asset being replaced, by replacing the old book value with the cost of the new asset. If it does not know the old book
value, then it still capitalizes the cost of the new asset, but with either a debit to the Accumulated Depreciation account of
the old asset or a debit to the old Asset account.

Q9-19The costs of ordinary repairs and maintenance are expenses incurred routinely to keep the asset in operating condition. Since these
costs do not increase the future benefits of the asset, a company expenses them as they are incurred. For interim financial
reporting, the use of an Allowance account is appropriate in order to even out the expenses. However, this account is
closed at the end of the year. Extraordinary repairs are those that cannot be foreseen and do not occur in the usual course
of operations, such as emergency repairs to a machine that breaks down during production. Usually, a company expenses
these costs, but care should be taken to note whether these repairs increase the future benefits of the asset. If they do,
then the company capitalizes the costs.

Q9-20Leasehold improvements are improvements made to leased property that, upon termination of the lease, will revert back to the lessor.
A company capitalizes the cost of these improvements and subsequently amortizes them over the economic life of the
improvements or the lease term, whichever is shorter.

Q9-21An Allowance for Repairs account appears only on balance sheets of interim financial statements if a company incurs repair costs
unevenly. At year-end, this account is closed; thus, it does not appear on a year-end balance sheet.

Q9-22A company accounts for the disposal of an asset by removing both the asset and accumulated depreciation to date from the ledger,
recording the receipt of cash, if any, and also recording any gain or loss. It reports this gain or loss in ordinary income (in
the category of Other Items) on the income statement unless it meets the criteria for an extraordinary item.

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Q9-23Under the successful-efforts method of accounting for oil and gas properties, a company capitalizes only those costs incurred in
drilling for successful wells while it expenses the costs of unsuccessful wells. In contrast, under the full-costing method a
company capitalizes all costs of drilling wells, whether the drilling was successful or not.

ANSWERS TO CASES

C9-1 (AICPA adapted solution)

1.The expenditures that are capitalized when equipment is acquired for cash include the invoice price of the equipment (net of discounts)
plus all incidental outlays relating to its purchase or preparation for use, such as insurance during transit, freight, duties, ownership
search, ownership registration, installation, and breaking-in costs. Any available discounts, whether taken or not, should be
deducted from the capitalizable cost of the equipment.

2.a.When the market value of the equipment is not determinable by reference to a similar cash purchase, the capitalizable cost of
equipment purchased with bonds having an established market price is the market value of the bonds.

b.When the market value of the equipment is not determinable by reference to a similar cash purchase, and the common stock used
in the exchange does not have an established market price, the capitalizable cost of equipment is the equipment's estimated
fair value if that is more clearly evident that the fair value of the common stock. Independent appraisals may be used to
determine the fair values of the assets involved.

c.When the market value of equipment acquired is not determinable by reference to a similar cash purchase, the capitalizable cost of
equipment purchased by exchanging similar equipment having a determinable market value is the lower of the recorded
amount of the equipment relinquished or the market value of the equipment exchanged.

C9-1 (continued)

3.The factors that determine whether expenditures relating to property, plant, and equipment already in use are capitalized are as follows:

•Expenditures are relatively large in amount.

•They are nonrecurring in nature.

•They extend the useful life of the property, plant, and equipment.

•They increase the usefulness of the property, plant, and equipment.

4.The net book value at the date of the sale (cost of the property, plant, and equipment less the accumulated depreciation) is removed from
the accounts. The excess of cash from the sale over the net book value removed is accounted for as a gain on the sale, while the
excess of net book value removed over cash from the sale is accounted for as a loss on the sale.

C9-2 (AICPA adapted solution)

1.Expenditures are capitalized when they benefit future periods. The cost to acquire the land is capitalized and classified as land, a
nondepreciable asset. Since tearing down the small factory is readying the land for its intended use, its cost is part of the cost of the
land and is capitalized and classified as land. As a result, this cost is not depreciated as it would be if it was classified with the
capitalizable cost of the building.

Since the rock blasting and removal is required for the specific purpose of erecting the building, its cost is part of the cost of the building and
is capitalized and classified with the capitalizable cost of the building. This cost is depreciated over the estimated useful life of the
building.

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The road is a land improvement, and its cost is capitalized and classified separately as a land improvement. This cost is depreciated over
its estimated useful life.

The added four stories is an addition, and its cost is capitalized and classified with the capitalizable cost of the building. This cost is
depreciated over the remaining life of the original office building because that life is shorter than the estimated useful life of the
addition.

2.The gain is recognized on the sale of the land and building because income is realized whenever the earning process is complete and the
sale takes place.

The book value at the date of the sale is composed of the capitalized cost of the land, the land improvement, and the building, as
determined above, less the accumulated depreciation on the land improvement and the building. The excess of the proceeds
received from the sale over the net book value at the date of sale is accounted for as part of income from continuing operations in
the income statement.
C9-3 (AICPA adapted solution)

1.The capitalizable cost includes all costs relating to purchase or preparation for use. Such cost may include delivery and installation. The
capitalizable cost represents the cash equivalent price and accordingly would not include interest charges.

2.Normal maintenance performed on the new machine should not be capitalized as part of the machine's cost. It should be expensed as
incurred if the machine is not used in the manufacturing process or should be inventoried as part of factory overhead if the machine
is used in the manufacturing process. Normal maintenance does not enhance the service potential of the machine.

3.The wing added to the manufacturing building should be capitalized. The addition should be depreciated over its estimated useful life or
the remaining useful life of the building of which it is an integral part, whichever is shorter. The addition should be included in the
property, plant, and equipment section of the balance sheet.

4.The leasehold improvements made to the office space should be capitalized. The leasehold improvements should be depreciated
(amortized) over their estimated useful lives or the term of the lease, whichever is shorter. The unamortized portion of the leasehold
improvements could be included as a separate caption in the property, plant, and equipment section or the intangible assets section
of the balance sheet. The amortized portion of the leasehold improvements would be shown as an expense in the income
statement.

C9-4 (AICPA adapted solution)

1.The following costs, if applicable, should be capitalized as a cost of land:

(a)Negotiated purchase price

(b)Brokers' commission

(c)Legal fees

(d)Title fee

(e)Recording fee

(f)Escrow fees

(g)Surveying fees

(h)Existing unpaid taxes, interest, or liens assumed by the buyer

(i)Clearing, grading, landscaping, and subdividing

(j)Cost of removing old building (less salvage)

(k)Special assessments such as lighting or sewers if they are permanent


in nature.

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C9-4 (continued)

2.A plant asset acquired on a deferred-payment plan should be recorded at an equivalent cash price excluding interest. If interest is not
stated in the sales contract, an imputed interest should be determined. The asset should then be recorded at its present value,
which is computed by discounting the payments at the stated or imputed interest rate. The interest portion (stated or imputed) of the
contract price should be charged to interest expense over the life of the contract.

3.In general, plant assets should be recorded at the fair value of the consideration given or the fair value of the asset received, whichever is
more clearly evident. This general theoretical preference is somewhat constrained by the requirements of APB Opinion No. 29.

Specifically when exchanging an old machine and paying cash for a new machine, the new machine should be recorded at the amount of
monetary consideration (cash) paid plus the undepreciated cost of the nonmonetary asset (old machine) surrendered if there is no
indicated loss. An indicated loss should be recognized; this would reduce the recorded amount of the new machine. No indicated
gain, however, should be recognized by the party paying monetary consideration.

C9-5 (AICPA adapted solution)

1.Capital expenditures benefit future periods. Revenue (operating) expenditures benefit the current period only.

2.a.The purchase price of the land should be capitalized. The land should be shown as a noncurrent asset on the balance sheet at its
original cost and it is not subject to depreciation.

b.The cost of constructing the factory should be capitalized and depreciated over the expected life of the factory. The depreciation
should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as cost of sales as goods
are sold. The factory expenditures, net of accumulated depreciation, should be shown as a noncurrent asset on the balance
sheet. Inventory should be reported as a current asset on the balance sheet, and cost of sales should be reported as an
expense on the income statement.

c.The cost of grading and paving the parking lot should be capitalized and depreciated over the expected life of either the factory or
parking lot, whichever is shorter. The depreciation should be added to cost of inventory, via factory overhead, as goods are
produced, and is expensed as cost of sales as goods are sold. The land improvement expenditures, net of accumulated
depreciation, should be shown as a noncurrent asset on the balance sheet. Inventory should be reported as a current asset
on the balance sheet, and cost of sales should be reported as an expense on the income statement.

C9-5 (continued)
2. (continued)

d.The cost of maintaining the factory once production has begun is a "revenue type" expenditure. However, since it is a factory cost,
it should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as cost of sales as
goods are sold. Inventory should be reported as a current asset on the balance sheet, and cost of sales should be reported as
an expense on the income statement.

C9-6

1.a.It is clear that considerable value attaches to the television rights. A conservative approach to the valuation is to compute the present
value of the cash flows expected under the currently existing television contract. However, since it can be expected that a
new television contract will be signed to replace the existing contract, probably at different rates, it could be argued that a
longer time period should be considered. Certainly a buyer would be including a longer time period in the estimation of the
future cash flows expected if the franchise is purchased.

b.The value assigned to the television rights is considered depreciable because the service provided by the franchise (that is, playing
the games) is partially used up each season. The depreciation is over the period used in determining the value of the
television rights. The argument against depreciating the value of the television rights would be that the televising of football
games can be expected to continue indefinitely in the future, and, therefore, the value does not decline.

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c.The purchase price assignable to player contracts is the present value of the benefits generated by the player less the salaries
payable under current contracts. This is a subjective valuation that would be very difficult to determine in practice.

d.The value assigned to the player contracts is depreciated over the estimated playing career or the contract period, whichever is
shorter.

e.The value of the franchise is the present value of the future cash flows, after tax, generated by the franchise. Thus, it includes the
expected cash inflow from television rights, ticket sales, etc., less the expected cash outflow for players' contracts, franchise
operations, etc. Presumably, this is believed by the buyer to be greater than $8.5 million.

C9-6 (continued)

2.Students may raise ethical issues, such as:

a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

b.The allocation of cost to each depreciable asset and the selection of the estimated useful life, and the effects of those choices on
net income.

c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
compute taxable income.

C9-7

1.There is no doubt that the first 2,000 acres qualifies for interest capitalization because it meets the various criteria of FASB Statement No.
34. It meets the criteria of a qualifying asset and the three criteria for the start of the capitalization period - expenditures have been
made, activities are in progress, and interest cost is being incurred.

The remaining 3,000 acres of the initial 5,000 acres also qualify for interest capitalization. FASB Statement No. 34 specifies that the term
"activities" is to be construed broadly and should include more than physical construction. Since the 5,000 acres were acquired for a
single development, "activities" are in progress on the entire 5,000 acres.

It is less definite whether the adjacent parcel of land qualifies for interest capitalization. The decision will probably be determined by how
the company has developed its plans. If the plans indicate that the entire project is a single integrated development on which design
work has been performed and permits obtained, then the adjacent parcel of land would also qualify for interest capitalization. On the
other hand, if the company's plans indicate that the additional acreage was acquired for speculative reasons and the design work
and permits do not include this additional acreage, then the adjacent parcel of land does not qualify for interest capitalization.

The development also qualifies for interest capitalization because it meets the criteria of FASB Statement No. 34.

2.The company could commence activities on all the land, by starting such activities as planning the future expansion. Since FASB
Statement No. 34 states that the term activities is to be construed broadly, such actions would allow the company to compute the
interest capitalized on the amounts borrowed to acquire all the land. This would increase the interest capitalized and the asset
value, thereby reducing interest expense and increasing net income.

C9-8

Capitalize at $100,000: The option costs are not applicable to the purchase price and are, therefore, not a cost of the land. Rather, they
are an expense incurred during the year required to make a decision and should not be capitalized. The option was for a period of
one year and thus its usefulness has expired and should not be capitalized.

Capitalize at $105,000: Because the option cost of $5,000 was necessary in order to purchase the desired site, this amount should be
capitalized along with the contract price of $100,000. The option for the site not chosen has no usefulness once the other site was
purchased and should be expensed.

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Capitalize at $110,000: In order for the company to make the best choice as to sites, it was necessary to acquire both options. Therefore,
regardless of which site was chosen, the total cost of both options should be capitalized along with the contract price.

C9-9

According to APB Opinion No. 29, donated assets are recorded at their fair value. The controller's argument of no payment by the company
is what makes the acquisition a nonreciprocal transfer and thus governed by APB No. 29. This procedure also makes the recording
of the asset consistent with the treatment of other assets that are recorded at their fair value at the date of acquisition.

The alteration costs of $15,000 are necessary in order for the company to put the building into operating condition. These are considered a
cost of the building and are capitalized. The possibility of the building being returned to the city is not relevant to the capitalization of
these costs, unless the return is considered probable under the terms of FASB Statement No. 5. The argument that exclusion of the
$15,000 will closer approximate the market value of the building is invalid. There is no relationship between an asset's recorded
value and its fair value, except by coincidence. The issue of reducing income taxes is also not relevant to financial reporting.

C9-10 (AICPA adapted solution)

1.The valuation of assets that are acquired by a corporation in exchange for its own common stock is sometimes difficult because of:

a.The absence of a readily determinable fair value for the assets acquired because they are not traded actively.

b.The absence of a readily determinable fair value for the securities given in exchange, either because they are not traded actively or
because the proportion of the number of shares in this single issue to all shares being traded is large enough to affect the
market price substantially.

c.The absence of arm's length or independent bargaining leading to the exchange.


C9-10 (continued)
1. (continued)

d.Widely varying estimates of the value of the asset acquired because of its nature (for example, unexplored or unproved mineral
deposits, manufacturing rights and patents).

e.The common presumption that when capital stock has a par or stated value it imputes a value to the assets for which it is
exchanged.

2.a.The directors of Brahe Corporation appraised the leases at $600,000 and the transaction involving the stock issuance to Messrs. Moses
and Price supports that appraisal. In the exchange transaction, a price of $6 per share was imputed to the Brahe Corporation
common stock when 75,000 shares were given to Messrs. Moses and Price ($6 x 75,000 = $450,000) in exchange for assets
worth $200,000 and options which, based on the appraisal of the directors, were worth $250,000. This transaction was
followed by a public sale of 180,000 shares of Brahe Corporation common stock at $6 per share, the same price that was
imputed to the stock earlier when Messrs. Moses and Price obtained 75,000 shares in connection with the exchange. The fact
that the public was willing to purchase, and did purchase, substantial shares at the same price would indicate that the
appraisal value of leases recorded on the books is a reasonable one. Furthermore, the law allows boards of directors broad
discretion in establishing values, provided there is no fraud.

b.Brahe Corporation might have taken additional steps to demonstrate the reasonableness of the $600,000 appraisal of leases so
that more information would be available if questions were raised about their possible overvaluation. Because the appraisal
was based solely upon the lease price of certain other acreage in the area, it would have been wise to obtain supplementary
appraisals by independent competent technicians to support the value. This is particularly true because the board was not
independent, having been elected by Messrs. Moses and Price, who were the sole stockholders, and also the parties who
were offering the options to Brahe Corporation. In addition, Brahe Corporation could have compiled data to substantiate
beyond doubt the reasons why an acceptable bargain purchase did exist here in permitting the purchase with options for only
$350,000 of leases worth the substantially higher amount of $600,000.

3.Based on available information, Brahe Corporation should charge 1/10 of the value of the leases against income at December 31, 2001, in
accordance with generally accepted accounting principles. However, this should not be done if (a) the total lease acreage can be

9-10
regarded as a unitary whole, or (b) the investment was made with anticipation that some portion of the total acreage obtained would
prove worthless.

C9-11

Note to Instructor: This case does not have a definitive answer. From a financial reporting perspective, GAAP is identified and
summarized. From an ethical perspective, various issues are raised for discussion purposes.

From a financial reporting perspective, there are 3 issues. The first issue relates to when interest capitalization begins. Under GAAP, it
begins when (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its intended
use are in progress, and (3) interest cost is being incurred. Assuming that the company has debt and that the architect has been
paid (often a retainer is paid), then the three conditions probably were met in 1999. A second issue is the costs that can be included.
The expenditures on which interest is capitalized are the cumulative capitalized expenditures on the project. This would allow
including 1/12 of the accountant's salary and similar expenditures, although it would be necessary to have documentation that such
costs were directly related to the project. The third issue is how to report the interest cost if there was no capitalization in 1999. If
interest was not capitalized, then this is an error because there was a misapplication of accounting principles. The error would be
accounted for as a prior period adjustment. So the CEO has to accept the "good" of maximizing the interest capitalization in 2000
and the "bad" of admitting to an error in applying accounting principles (even though income in 1999 will be increased by the error
correction). Of course, the suggestion of including 1999's interest capitalization in 2000 is not appropriate.

From an ethical perspective, the issue is whether it is appropriate to "dump" costs into the project so that the costs are maximized, interest
capitalized is maximized, interest expense and other expenses are minimized, and net income is maximized. The primary
stakeholders are the company's current and potential stockholders and creditors. Accounting principles allow for judgment on these
issues and expect that professional judgment be exercised. On the other hand, if the net income amount is not grounded in
economic reality, current and potential stockholders may be misled about the value of an investment in the company. Also, the CEO
should be reminded that the higher cost of the building will result in higher depreciation expense, although that long-term perspective
may be of no concern.

C9-12

Note to Instructor: Students are expected to cite paragraphs from the FASB Original Pronouncements in their research of this issue. Since
the Statements of Concepts are not included in the FASB Current Text, reference is made to Intermediate Accounting. Also, the issues in
this case are addressed by the FASB Emerging Issues Task Force Issue No. 89-13 which is included in a separate published volume.

1. To:President, Tenth National Bank

From:Student

I have researched the issue of how to account for the costs of removing the asbestos from the two buildings. According to the FASB
Original Pronouncements, Concepts Statement No. 6, par. 25 and 26 (Intermediate Accounting, p. 58) assets are probable future
economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Also, an asset involves a
capacity to contribute directly or indirectly to future cash flows.

First, I will deal with the office building that was purchased with a known asbestos problem. The $2 million cost of removing the asbestos
may be considered to be a cost that was necessary to prepare the building for its intended use. It may also be argued that the cost
of $2 million indirectly contributes to the future cash inflows because without the cost the building could not be used. Both these
arguments assume that the selling price was reduced because of the known estimated costs of removing the asbestos. Based on
these issues, I recommend that the $2 million be capitalized to the cost of the building.

Note that a counter argument is that the $2 million is a "maintenance" cost that does not extend the useful life or improve the physical
structure beyond the state in which it was originally intended to be used. Under this argument, the cost would be expensed.

The second issue is the shopping mall in which the asbestos problem was not known at the time the building was acquired. The following
alternatives may be considered:

9-11
a.Expense the $1 million because it is a "maintenance" cost that does not extend the useful life or improve the property beyond its
original state. Instead the cost returns the building to its normal state of repair. Also, it may be argued that the "extra" cost
does not benefit future periods.

b.Capitalize the $1 million for the reasons outlined earlier for the office building. Also, it may be argued that incurring the costs has
extended the life of the mall because without the costs the life would be very short. However, these arguments assume that
the mall can be sold at a profit; that is, the $1 million can be recovered through a sale. If a loss is expected, the cost must be
expensed.

c.Capitalize the portion of the $1 million that relates to "normal" replacement of the affected portions of the building and expense any
"special" costs incurred because of the asbestos problem.
C9-12 (continued)
1. (continued)

I recommend that the $1 million be expensed (unless it can be demonstrated that the amount will be recovered through a sale which seems
unlikely since the building was obtained through a foreclosure).

Another issue is how to classify the expense. Three alternatives are:

a.Report as an extraordinary item because it is considered to be unusual and infrequent (FASB Current Text, par. I17.401 or FASB
Original Pronouncements, APB 30, par. 20). This alternative is difficult to justify because of the numerous asbestos problems
affecting large numbers of buildings.

b.Report as an unusual or infrequent item that is disclosed as a separate line item in the income statement. This alternative is easier
to justify because asbestos problems have occurred infrequently for this bank.

c.Report as an operating expense with no special disclosure in the income statement.

I recommend that the $1 million be classified as an operating expense with no special disclosure in the income statement because asbestos
problems have become so widespread and banks frequently repossess buildings, thereby making the cost neither unusual nor
infrequent. However, disclosure in the notes to the financial statements may be appropriate.

Note that this recommendation does not consider the value at which the repossessed shopping mall is carried. AICPA Statement of
Position No. 92-3 states that foreclosed assets held for sale are carried at the lower of the cost or fair value, less estimated costs to
sell.

2.Students may raise ethical issues, such as:

a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

b.The disclosure responsibilities of sellers.

c.The liability exposure of professionals who provide estimates of future costs.

9-12
C9-13

Note to Instructor: Students are expected to cite paragraphs from the FASB Current Text or FASB Original Pronouncements in their
research of this issue.

1. To:President, Perry Park Company

From:Student

I have researched the various issues involved in the exchange of the shares for the land and building. I will address each of the major
issues you raised:

a.Does the transaction qualify as a nonmonetary exchange? Since no cash was exchanged, it is a nonmonetary exchange.
However, according to the FASB Current Text, par. N35.407 (FASB Original Pronouncements, APB 29, par. 3e), similar
productive assets are of the same general type, that perform the same function, or that are employed in the same line of
business. Clearly the exchange of shares for land and a building does not meet this criterion. Therefore, the exchange is of
dissimilar productive assets and the transaction must be recorded at fair value.

b.What is the value to place on the transaction and its components? According to the FASB Current Text, par. N35.105 (FASB
Original Pronouncements, APB 29, par. 18), either the value of the shares or the value of the land and building may be used,
but the most reliable value should be used. If both values are equally unreliable, it is preferable to use the value of the assets
because it is independent of the value of the shares. A final alternative is to have the Board of Directors place a value on the
transaction.

2.Students may raise ethical issues, such as:

a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

b.The value assigned by each entity will affect net income, and perhaps management compensation such as bonuses.

c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
compute taxable income.

ANSWERS TO MULTIPLE CHOICE

1. c 3. b 5. b 7. d 9. c
2. b 4. d 6. c 8. b 10. c

9-13
9-14
SOLUTIONS TO EXERCISES

E9-1

The following are included in the cost:

1.Contract price
3.Freight costs
6.Installation costs
7.Testing costs
8.Overhaul costs before use
9.Costs of grading land prior to construction
10.Tax assessment for street improvements
11.Delinquent property taxes on property acquired
13.Cost of insurance during construction (could be expensed)
15.Interest costs during construction (not imputed interest)
16.Landscaping costs
18.Cost of tearing down a building on newly acquired land
19.Replacement of an electric motor in a machine (if benefits are increased)
20.Expansion of the heating/cooling system

The following are not included in the cost:

2.List price
4.Discounts taken (unless equal to discounts available, which are not included in the cost)
5.Discounts not taken
12.Cost of tearing down an old building (already owned)
14.Excess of costs over revenue during development stage
17.Severance pay for employees dismissed because of acquisition
21.Service contract for 2 years on the acquired asset
22.Cost of training new employees

E9-2

The following are included in property, plant, and equipment:

6.Fully depreciated assets still being used


7.Leasehold improvements

The following are not included in property, plant, and equipment:

1.Idle equipment awaiting sale


2.Land held for future use as a plant site
3.Land held for investment
4.Deposits on machinery not yet received
5.Progress payments on building being constructed
8.Assets leased to others

9-15
E9-3

Machine 213,000*
Repair Expense 1,000
Cash 214,000

*$200,000 - ($200,000 x 0.02) + $5,000 + $10,000 + $2,000

E9-4

1.The fair value of the asset is considered to be the cash price of $210,000 and thus the machine is recorded at this
fair value. Since a $50,000 down payment is made, the remaining $160,000 has to be allocated between the
note and the preferred stock. In most situations, it would be considered that the 10% fair value of the note
should take precedence over the agreed value of the preferred stock.

Present value of note: Four annual payments of $30,000


Present value factor n=4, i=10% 3.169865*
$95,095.95

*Factor from Table 4 of Appendix D

Machinery 210,000.00
Discount on Notes Payable ($120,000 - $95,095.95) 24,904.05
Notes Payable 120,000.00
Preferred Stock, $100 par ($100 x 600) 60,000.00
Additional Paid-in Capital on Preferred Stock 4,904.05
Cash 50,000.00

Alternatively, if preference was given to the agreed value of the preferred stock, the journal entry to record the
acquisition would be

Machinery 210,000
Discount on Notes Payable 20,000
Notes Payable 120,000
Preferred Stock, $100 par 60,000
Cash 50,000

2.If the $210,000 cash price were not known, the fair value of the note and the agreed value of the preferred stock
would be used.

Machinery [($120,000 - $24,904.05) +


$50,000 + $60,000] 205,095.95
Discount on Notes Payable 24,904.05
Notes Payable 120,000
Preferred Stock, $100 par 60,000
Cash 50,000

9-16
E9-5 (AICPA adapted solution)

Cash equivalent price $9,500


Installation costs 300
Capitalized cost $9,800

Machinery 9,800
Discount on Notes Payable 1,500
Cash 1,300
Notes Payable 10,000

The asset should be recorded at its cash equivalent price of $9,500 plus installation costs of $300. This forces a
discount to be reported on the note payable, and interest to be recognized even though recognition of interest
on a note of less than one year is not required by APB Opinion No. 21.

E9-6 (AICPA adapted solution)

Land:
Purchase price $50,000
Demolition of old building 4,000
Legal fees 2,000
Salvaged materials (3,000)
$53,000

Building:
Architect's fees $ 20,000
Construction costs 500,000
$520,000

E9-7

Acquisition cost $200,000


Appraisal 20,000
Total cost $220,000

Appraisal
Values % of Total

Land $100,000 40%


Building 125,000 50%
Equipment 25,000 10%
Total value $250,000 100%

Cost assigned to:

Land 40% x $220,000 = $ 88,000


Building 50% x $220,000 = $110,000
Equipment 10% x $220,000 = $ 22,000
Total cost assigned $220,000

9-17
E9-8

Denver Company
Building: Warehouse (new) 30,000b
Accumulated Depreciation: Building 50,000
Loss 10,000a
Building: Warehouse (old) 90,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $30,000 - $40,000
b
Cost = Fair value of asset surrendered

Bristol Company
Building: Warehouse (new) 25,000a
Accumulated Depreciation: Building 10,000
Building: Warehouse (old) 35,000
a
Gain is not recognized (since no boot is received)

Cost = BV of asset surrendered

Note: Denver Company's journal entry is consistent with alternative 1 in Exhibit 9-2. Bristol Company's journal entry
is consistent with alternative 2 in Exhibit 9-2.

E9-9

Denver Company
Building: Warehouse (new) 30,000b
Accumulated Depreciation: Building 50,000
Loss 12,000a
Building: Warehouse (old) 90,000
Cash 2,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $28,000 - $40,000
b
Cost = FV of asset surrendered + Boot paid = $28,000 + $2,000

9-18
E9-9 (continued)

Bristol Company
Cash 2,000
Building: Warehouse (new) 23,333b
Accumulated Depreciation: Building 10,000
Gain 333a
Building: Warehouse (old) 35,000
a
Total gain = FV of asset surrendered - BV of asset surrendered

$5,000 = $30,000 - $25,000

Gain recognized = Boot x (FV-BV) = $2,000 x $5,000=$333


Boot + Fair value ($2,000+$28,000) (rounded)
of asset received
b
Cost = BV + Gain recognized - Boot received = $25,000 + $333 - $2,000

Note: Denver Company's journal entry is consistent with alternative 3 in Exhibit 9-2. Bristol Company's journal entry
is consistent with alternative 6 in Exhibit 9-2.

E9-10

Denver Company
Building: Warehouse (new) 30,000b
Accumulated Depreciation: Building 50,000
Loss 7,000a
Cash 3,000
Building: Warehouse (old) 90,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $33,000 - $40,000
b
Cost = FV of asset surrendered - Boot received = $33,000 - $3,000

Bristol Company
Building: Warehouse (new) 28,000b
Accumulated Depreciation: Building 10,000
Building: Warehouse (old) 35,000
Cash 3,000
a
Gain is not recognized (since no boot was received)
b
Cost = BV of asset surrendered + Boot paid = $25,000 + $3,000

Note: Denver Company's journal entry is consistent with alternative 5 in Exhibit 9-2. Bristol Company's journal entry
is consistent with alternative 4 in Exhibit 9-2.

9-19
E9-11

The exchange is of dissimilar productive assets.

Leonard Company
Truck 9,000
Accumulated Depreciation: Machine 24,000
Gain 3,000a
Machine 30,000
a
Gain = FV of asset surrendered - BV of asset surrendered
= $9,000 - $6,000

Wilson Company
Machine 9,000
Accumulated Depreciation: Truck 4,000
Gain 1,000a
Truck 12,000
a
Gain = FV of asset surrendered - BV of asset surrendered
= $9,000 - $8,000

E9-12

The exchange is of dissimilar productive assets.

Leonard Company
Truck 9,000
Accumulated Depreciation: Machine 24,000
Gain 2,500a
Machine 6,000
Cash 500
a
Gain = FV of asset surrendered - BV of asset surrendered
= $8,500 - $6,000

Wilson Company
Machine 8,500
Cash 500
Accumulated Depreciation: Truck 4,000
Truck 12,000
Gain 1,000a

a
Gain = FV of asset surrendered - BV of asset surrendered
= $9,000 - $8,000

9-20
E9-13 (AICPA adapted solution)

The exchange is of similar productive assets and, therefore, is recorded at cost and not fair value. Minor will value
Smith's contract at $145,000. Better will value Doe's contract at $140,000.

E9-14

Note: The exercise makes no mention of the capacity at which the company is operating.

1.If the company is operating at full capacity so that the construction causes less regular production to take place, the
cost of the constructed asset should be as follows:

Materials and supplies $20,000


Direct labor 45,000
Overhead (50% of direct labor) 22,500
Supervisor's overtime 5,000
$92,500

Under this alternative, the construction is accounted for in the same way as regular products. The overtime might be
excluded if it has been included in the overhead rate. An unfavorable variance might be charged to the
construction.

If the company is operating with excess capacity, the cost of the constructed asset should be as follows:

Materials and supplies $20,000


Direct labor 45,000
Overtime - supervisor 5,000
$70,000

Since regular production continues, none of the fixed overhead is allocated to the construction project, so that the unit
cost of the regular products is not reduced. This alternative recognizes that the cost of the asset is the
additional cost incurred to produce it and that the overhead would be incurred whether or not the construction
takes place.

Note that these two solutions are the logically desirable results under the conditions described, but there is no
requirement that companies actually use the alternative in these particular circumstances.

2.If the bid from the outside contractors was $80,000, it is questionable whether the use of the full overhead rate is
appropriate. The incremental approach seems more reasonable in this situation.

If the bid was $60,000, the Harshman Company has clearly incurred excessive costs to construct the building. The
building should be recorded at $60,000 and the excess costs should be recorded as a loss on construction.

9-21
E9-15

1.Land 60,000
Building 40,000
Donated Capital 100,000

2.The agreement to employ 350 people for 10 years is disclosed in a note to the financial statements, if material.

3.Even though title would not pass to the company for 10 years, the land and building is still recorded on the books of
the company. Disclosure of the contingency associated with the title is included in the notes to the financial
statements.

E9-16

1.Capitalized interest = Average cost x Interest rate


= [($0 + $700,000)  2] x 12%
= $42,000

2.The capitalized interest increases the cost of the building and therefore increases the depreciation expense each
year of the assets' life.

E9-17

Capitalized interest = Average cost x Interest rate


= [($0 + $6,000,000)  2] x 12%
= $360,000

Interest revenue = Average temporary investment x Interest rate


= ($8,000,000 - $3,000,000) x 11%
= $550,000

E9-18

The following are recorded as capital expenditures:

1.Cost of installing machinery


2.Cost of moving machinery
4.Cost of major overhaul
5.Installation of safety device (unless no economic benefits are realized)
7.Property taxes on land and buildings held for investment
8.Cost of rearranging offices

The following are recorded as operating expenditures:

3.Repairs as a result of an accident


6.Property taxes on land and buildings
9.Cost of repainting offices
10.Ordinary repairs

9-22
E9-19

1.a.Successful-efforts method. 40% of drilling is unsuccessful. Therefore:

40% x $2,000,000 = $800,000 is expensed

b.Full-cost method. All costs are capitalized, so no drilling expense is recognized.

2.Value on balance sheet (before recording depletion)

a.Successful-efforts method. 60% of drilling efforts are successful. Therefore:

60% x $2,000,000 = $1,200,000 appears on the balance sheet


as oil and gas properties

b.Full-cost method. All drilling costs are capitalized; therefore, $2,000,000 appears on the balance sheet as oil
and gas properties.

9-23
9-24
SOLUTIONS TO PROBLEMS

P9-1

Adjusting entries at December 31, 2001 to correct the books. All original entries must be reversed out of the Land and
Buildings account and recorded in correct accounts.

1.Land 24,500
Land and Buildings 24,500
To record purchase, demolition of old
building, and legal fees in separate
Land account.

2.Building 2,700
Land and Buildings 2,700
Interest on loan for construction.

3.Building 50,000
Land and Buildings 50,000
To record cost of construction
in separate Building account.

4.Land Improvements 1,200


Land and Buildings 1,200
Sewer assessment.

5.Land 3,500
Land and Buildings 3,500
Cost of landscaping.
Note: If the landscaping has a limited
life, the cost should be recorded in the
Land Improvements account.

6.Equipment 18,000
Land and Buildings 18,000
Excavation equipment purchase.

7.Building 15,000
Land and Buildings 15,000
Fixed overhead charged to building
construction (alternatively, this item
could be charged to regular production
through Goods in Process).

8.Building 1,000
Land and Buildings 1,000
Cost of insurance during construction
(alternatively, could be recorded as
Insurance Expense).

9.Profit (Gain) on Construction 12,000

9-25
Land and Buildings 12,000
Reversing of profit improperly recognized.

P9-1 (continued)

10.Loss Due to Worker's Injury 3,000


Land and Buildings 3,000
To expense cost to compensate
construction worker.

11.Loss Due to Modifications to Building 7,500


Land and Buildings 7,500
To expense avoidable costs required by
inspectors due to planning error.

12.Land 2,500
Land and Buildings 2,500
1998 property tax expense on land
(alternatively, could be recorded
as Property Tax Expense).

13.Land and Buildings 700


Land 700
Credit to Land account for salvage
value of demolished building.

14.Land and Buildings 14,000


Loss on Sale of Equipment 4,000
Equipment 18,000
To write off equipment sold and recognize
loss on sale (note that Depreciation should
have been recorded; however, the total of
the depreciation and the loss would be $4,000).

P9-2

Note: This question requires knowledge that corrections of errors in prior years are recorded to Retained Earnings.
This was briefly discussed in Chapter 4.

Adjusting entries at December 31, 2002 to correct the books. The building and machinery should be recorded in
separate accounts.

Purchase price of $60,000 is a lump-sum purchase:

Building $39,000 60%


Machinery 26,000 40%
$65,000 100%

Machinery is valued at 40% x $60,000 = $24,000


Building is valued at 60% x $60,000 = $36,000

Machinery 24,000

9-26
Building 36,000
Property, Plant, and Equipment 60,000

P9-2 (continued)

Machinery 280
Building 420
Property, Plant, and Equipment 700
The legal fees are allocated in the same
proportion as the original purchase.

Retained Earnings 2,400


Property, Plant, and Equipment 2,400
To correct the insurance paid in 2000 that
was incorrectly recorded in the asset account.

Property, Plant, and Equipment 6,310


Accumulated Depreciation: Building 1,821
Accumulated Depreciation: Machinery 3,035
Retained Earnings 1,454
To remove the depreciation of $6,310 incorrectly
credited to Property, Plant, and Equipment in 2000;
to credit the correct depreciation to Accumulated
Depreciation: Building ($36,420  20); to credit
the correct depreciation to Accumulated Depreciation:
Machinery ($24,280  8); and to correct the amount
recorded as depreciation expense by a credit to
Retained Earnings.

Retained Earnings 2,000


Property, Plant, and Equipment 2,000
To correct the 2001 repairs that were
incorrectly recorded in the asset account.

Building 10,000
Property, Plant, and Equipment 10,000
To properly classify the 2001 addition
to the building.

Property, Plant, and Equipment 6,879


Accumulated Depreciation: Building 2,347
Accumulated Depreciation: Machinery 3,035
Retained Earnings 1,497
To remove the depreciation of $6,879 incorrectly
credited to Property, Plant, and Equipment in 2001;
to credit the correct depreciation to Accumulated
Depreciation: Building [$1,821 + ($10,000  19)]
(this assumes the addition has the same life as the
building); to credit the correct depreciation to
Accumulated Depreciation: Machinery ($24,280  8);
and to correct the amount recorded as depreciation
expense by a credit to Retained Earnings.

9-27
Repairs Expense 3,000
Property, Plant, and Equipment 3,000
To expense the repairs for 2002,
before the books are closed.

P9-2 (continued)

Insurance Expense 1,400


Prepaid Insurance 1,400
Property, Plant, and Equipment 2,800
To correctly classify the 2002 insurance
payment, before the books are closed.

Machinery 7,000
Property, Plant, and Equipment 7,000
To correctly classify the machinery
purchased in 2002.

Loss on Disposal of Machinery 100


Property, Plant, and Equipment 500
Accumulated Depreciation: Machinery 200
Machinery 800
To correctly record the disposal of the
machinery in 2002; the machine is 2 years
old and so has $200 related accumulated
depreciation.

Property, Plant, and Equipment 7,421


Accumulated Depreciation: Building 2,347
Accumulated Depreciation: Machinery 3,810
Depreciation Expense 1,264
To remove the depreciation of $7,421
incorrectly credited to Property, Plant,
and Equipment in 2002; to credit the
correct depreciation to Accumulated
Depreciation: Building; to credit the
correct depreciation to Accumulated
Depreciation: Machinery [($24,280 + $7,000 -
$800)  8]; and to correct the depreciation
expense before the books are closed.

P9-3

1.Investment in Land 74,000


Cash 74,000

2.Land 50,000a
Buildings 150,000b
Common Stock, $3 par 60,000
Additional Paid-in Capital on Common Stock 140,000

9-28
($60,000  $240,000) x $200,000
a

($180,000  $240,000) x $200,000


b

3.Machinery and Equipmenta 153,000


Repair Expense 2,000
Cash 155,000
a
$120,000 + $7,000 + $10,000 + $16,000

P9-3 (continued)

4.Land Improvements 30,000


Cash 30,000

5.Cash 6,000
Accumulated Depreciation 16,000
Machinery and Equipment 20,000
Gain on Disposal 2,000

6.Land 60,000a
Buildings 78,000b
Investment in Land 37,000
Cash 101,000
a
$37,000 + $26,000 - $3,000
b
$60,000 + $18,000 (imputed interest is ignored)

7.Leasehold Improvements 20,000


Cash 20,000

8.Machinery and Equipment 32,000


Cash 32,000

Royalty Expense 12,000


Cash 12,000

P9-4 (CMA adapted solution)

1.Raw Materials
Iron castings $61,040
Other raw materials 50,200 $111,240

Direct Labor
Layout (90 x $5.00) $ 450
Electricians [(380 - 80) x $9.00] 2,700
Machinery [(1,100 - 200) x $8.00] 7,200
Heat treatment (100 x $7.50) 750
Assembly [(450 - 100) x $7.00] 2,450
Testing [(180 - 20) x $8.00] 1,280

9-29
Additional testing labor [(180 - 20) x $5.00) 800 15,630

Factory Overhead
Layout and electricians ($3,150 x 0.70) $ 2,205
Machining, heat treatment, assembly,
testing ($12,480 x 1.00) 12,480 14,685
Interest Paid 4,260
Total amount to be capitalized $145,815

P9-4 (continued)

2.Alternate procedures are possible for two costs--rework costs (affects direct labor, repairs and maintenance, and
factory overhead) and factory overhead.

a.Rework costs should be treated as a cost of the period when they are abnormal. Rework costs arising from
errors that ought not to have occurred should be treated as losses of the period. Apparently, this was
the case in this situation because the damage resulted from a type of error that was not expected.
Consequently, rework costs and related repairs and maintenance expenses ($1,340) were not
capitalized in Requirement 1.

Rework costs can be capitalized when they are considered normal and can be explained by errors resulting
from the uncertainties associated with the new machine design. When this occurs, rework and repairs
and maintenance are necessary to make the machine operational.

b.There are three alternate ways to allocate overhead costs to self-constructed assets. The method followed
in Requirement 1 was to assign a full share of all overhead costs to the self-constructed asset. The
reasoning justifying this treatment is that all productive output should absorb its proportionate share of all
factory overhead costs.

A second method is to capitalize variable and traceable fixed overhead (however, there was no traceable fixed
overhead). Variable and traceable fixed overheads are incurred to build the asset and will benefit future
periods; consequently, these costs should be capitalized. Nontraceable fixed overhead costs would
have been incurred in any case so that there is no causal relationship between the fixed overhead costs
and the self-constructed asset; therefore, these overhead costs would not be capitalized.

A third method is to assign no overhead to the self-constructed asset. The reasoning used in this case is that
overhead is primarily a fixed expense and chargeable only to normal operations.

P9-5

1.Stock exchanged: 1,000 shares at $25/share = $25,000

Land 25,000
Common Stock, $10 par 10,000
Additional Paid-in Capital on Common Stock 15,000

2.A charge (debit) to Accumulated Depreciation is the best method for this replacement since a separate value for the
old engine is not known.

Accumulated Depreciation: Truck 1,000


Cash (Accounts Payable, etc.) 1,000

9-30
P9-5 (continued)

3.Land is acquired:

Land 50,000
Preferred Stock, $50 par 25,000
Additional Paid-in Capital on Preferred Stock 25,000

The value of $45,000 may be the most conservative, but the value of $50,000 has the advantage of greater
verifiability. The value at which the stock was traded 2 months ago is out of date.

4.The present value of the 2-year noninterest-bearing note, using the 10% imputed interest rate, is: $10,000 x
0.826446* = $8,264

*Factor from Table 3 of Appendix D

Machinery 8,264
Discount on Notes Payable 1,736
Notes Payable 10,000

P9-6 (AICPA adapted solution)

1. TOWNSAND COMPANY
Analysis of Land Account
for 2001

Balance at January 1, 2001 $ 100,000


Land site number 621:
Acquisition cost $1,000,000
Commission to real estate agent 60,000
Clearing costs $15,000
Less: Amounts recovered (5,000) 10,000
Total land site number 621 1,070,000

Land site number 622:


Land value $ 200,000
Building value 100,000
Demolition cost 30,000
Total land site number 622 330,000
Balance at December 31, 2001 $1,500,000

TOWNSAND COMPANY
Analysis of Buildings Account
for 2001

Balance at January 1, 2001 $800,000


Cost of new building constructed on
land site number 622:
Construction costs $150,000
Excavation fees 11,000

9-31
Architectural design fees 8,000
Building permit fee 1,000 170,000
Balance at December 31, 2001 $970,000
P9-6 (continued)
1. (continued)

TOWNSAND COMPANY
Analysis of Leasehold Improvements Account
for 2001

Balance at January 1, 2001 $500,000


Electrical work 35,000
Construction of extension to current
work area ($80,000 x ½) 40,000
Office space 65,000
Balance at December 31, 2001 $640,000

TOWNSAND COMPANY
Analysis of Machinery and Equipment Account
for 2001

Balance at January 1, 2001 $700,000


Cost of new machines acquired:
Invoice price $75,000
Freight costs 2,000
Unloading charges 1,500 78,500
Balance at December 31, 2001 $778,500

2.Items in the fact situation which were not used to determine the answer to Requirement 1 above, and where, or if,
these items should be included in Townsand's financial statements are as follows:

a.Land site number 623, which was acquired for $600,000, should be included in Townsand's balance sheet
as land held for resale.

b.Painting of ceilings for $10,000 should be included as a normal operating expense in Townsand's income
statement.

c.Royalty payments of $13,000 should be included as a normal operating expense in Townsand's income
statement.

P9-7

1.Exchange of similar productive assets

Hurni Company
Machine (new) 10,000b
Accumulated Depreciation: Machine 25,000
Loss 7,000a
Machine (old) 40,000
Cash 2,000

9-32
a
Loss = FV of asset surrendered - BV of asset surrendered
= $8,000 - $15,000
b
Cost = FV of asset surrendered + Boot paid = $8,000 + $2,000

P9-7 (continued)
1. (continued)

Other Company
Cash 2,000
Machine (new) 8,000a
Machine (old) 10,000
a
Gain = 0 (FV of asset surrendered = BV of asset surrendered)

Cost = BV of asset surrendered + Gain - Boot received


= $10,000 + 0 - $2,000

Note: Hurni Company's journal entry is consistent with alternative 3 in Exhibit 9-2. The Other Company's journal
entry is consistent with alternative 6 in Exhibit 9-2.

2.Exchange of dissimilar productive assets: all gains and losses recognized

Hurni Company
Building 55,000
Land 30,000
Cash 5,000
Gain 20,000a
a
Gain = (FV of asset surrendered - BV of asset surrendered)
= $50,000 - $30,000

Other Company
Cash 5,000
Land 50,000a
Building 55,000
a
Gain = 0 (FV of asset surrendered = BV of asset surrendered)

Cost = FV of asset surrendered - Boot received = $55,000 - $5,000

3.Exchange of similar productive assets

Hurni Company
Machine (new) 13,000a
Accumulated Depreciation: Machine 2,000
Machine (old) 13,000
Cash 2,000
a
Gain is not recognized (since no boot is received)

9-33
Cost = BV of asset surrendered + Boot paid
= $11,000 + $2,000
P9-7 (continued)
3. (continued)

Other Company
Cash 2,000
Machine (new) 18,000a
Machine (old) 20,000
a
Gain = 0 (BV of asset surrendered = FV of asset surrendered)

Cost = BV of asset surrendered + Gain - Boot received


= $20,000 + 0 - $2,000

Note: Hurni Company's journal entry is consistent with alternative 4 in Exhibit 9-2. The Other Company's journal
entry is consistent with alternative 6 in Exhibit 9-2.

4.Exchange of similar productive assets

Hurni Company
Equipment: Car (new) 4,412b
Accumulated Depreciation: Equipment 2,000
Cash 800
Equipment: Car (old) 7,000
Gain 212a
a
Total gain = FV of asset surrendered - BV of asset surrendered
= $6,800 - $5,000
= $1,800

Boot $800
Gain recognized = (FV-BV) = ($1,800) = $212
Boot + Fair value ($800+$6,000)
(rounded)
of asset received
b
Cost = BV of asset surrendered + Gain - Boot = $5,000 + $212 - $800

Other Company
Equipment: Car (new) 6,800a
Cash 800
Equipment: Car (old) 6,000
a
Gain = 0 (BV of asset surrendered = FV of asset surrendered)

Cost = BV of asset surrendered + Boot paid = $6,000 + $800

Note: Hurni Company's journal entry is consistent with alternative 6 in Exhibit 9-2. The Other Company's journal
entry is consistent with alternative 4 in Exhibit 9-2.

9-34
P9-8

1.Exchange of similar productive assets

Machine (new) 29,000a


Accumulated Depreciation: Machine 15,000
Machine (old) 40,000
Cash 4,000
a
Gain is not recognized (since no boot is received)

Cost = BV of asset surrendered + Boot paid


= $25,000 + $4,000

Note: This journal entry is consistent with alternative 4 in


Exhibit 9-2.

2.Exchange of similar productive assets

Machine (new) 34,000b


Accumulated Depreciation: Machine 7,000
Loss 3,000a
Machine (old) 40,000
Cash 4,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $30,000 - $33,000
b
Cost = FV of asset surrendered + Boot paid = $30,000 + $4,000

Note: This journal entry is consistent with alternative 3 in


Exhibit 9-2.

3.Exchange of similar productive assets

Machine (new) 16,875b


Accumulated Depreciation: Machine 25,000
Cash 5,000
Machine (old) 45,000
Gain 1,875a
a
Total gain = (FV of asset surrendered - BV of asset surrendered)

= ($32,000 - $20,000) = $12,000

Boot $5,000
Gain recognized = (FV-BV) = ($12,000)
Boot + Fair value $5,000 + $27,000

9-35
of asset received
= $1,875
b
Cost = BV of asset surrendered + Gain - Boot = $20,000 + $1,875 - $5,000

Note: This journal entry is consistent with alternative 6 in


Exhibit 9-2.

P9-8 (continued)

4.Exchange of similar productive assets

Machine (new) 27,000b


Accumulated Depreciation: Machine 9,000
Loss 4,000a
Cash 5,000
Machine (old) 45,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $32,000 - $36,000
b
Cost = FV of asset surrendered - Boot received
= $32,000 - $5,000

Note: This journal entry is consistent with alternative 5 in


Exhibit 9-2.

5.Exchange of similar productive assets

Machine (new) 80,000a


Accumulated Depreciation: Machine 70,000
Machine (old) 150,000
a
Gain is not recognized (since no boot is received)

Cost = BV of asset surrendered = $80,000

Note: This journal entry is consistent with alternative 2 in


Exhibit 9-2.

6.Exchange of similar productive assets

Machine (new) 90,000b


Accumulated Depreciation: Machine 56,000
Loss 4,000a
Machine (old) 150,000
a
Loss = FV of asset surrendered - BV of asset surrendered
= $90,000 - $94,000

9-36
b
Cost = FV of asset surrendered = $90,000

Note: This journal entry is consistent with alternative 1 in


Exhibit 9-2.

7.Exchange of dissimilar productive assets: all gains or losses recognized

Building 200,000
Gain 70,000
Land 130,000

P9-8 (continued)

8.Exchange of dissimilar productive assets: all gains or losses recognized

Building 200,000
Gain 40,000
Cash 30,000
Land 130,000

9.Exchange of dissimilar productive assets: all gains or losses recognized

Building 200,000
Cash 20,000
Gain 90,000
Land 130,000

P9-9

Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]

1.Average costs, 2001 $1,000,000 [($0 + $2,000,000)  2]

Average costs, 2002 $4,000,000 [($2,000,000 + $120,000) +


($2,120,000 + $3,760,000)  2]

Average costs, 2003 $8,500,000 [($2,120,000 + $3,760,000 + $458,000) +


($6,338,000 + $4,324,000)  2]

Capitalized interest, 2001 = $1,000,000 x 12%

= $120,000

Capitalized interest, 2002 = ($3,000,000 x 12%) + ($1,000,000 x 9.8%a)

= $360,000 + $98,000

= $458,000

Capitalized interest, 2003 = [($3,000,000x12%) + ($5,500,000x9.8%)] x 1/2b

= ($360,000 + $539,000) x 1/2

9-37
= $449,500

a
$ 6,000,000 $14,000,000
( x 14%) + ( x 8%)
$20,000,000 $20,000,000

b
Since the project is completed on June 30, 2003, interest for half a
year is capitalized.

P9-9 (continued)

2.Total costs = Expenditures + Capitalized interest

= ($2,000,000 + $3,760,000 + $4,324,000) + ($120,000 +


$458,000 + $449,500)

= $11,111,500

Cost - Estimated residual value


Straight-line depreciation =
Estimated service life

$11,111,500 - $0
=
20

= $555,575 in 2004

3.The interest capitalization has the following effects on the financial statements:

Income Statement:

2001:Interest expense decreased by $120,000. Net income increased by $120,000.

2002:Interest expense decreased by $458,000. Net income increased by $458,000.

2003:Interest expense decreased by $449,500. Net income increased by $449,500.

Balance Sheet:

December 31, 2001:Asset (construction in process) increased by $120,000. Retained earnings increased by
$120,000.

December 31, 2002:Asset (construction in process) increased by $458,000 for a total of $578,000. Retained
earnings increased by $458,000, for a total of $578,000.

9-38
December 31, 2003:Asset (construction in process) increased by $449,500 for a total of $1,027,500. Retained
earnings increased by $449,500, for a total of $1,027,500.

Cash Flow Statement:

If the company is producing the asset for its own use, the cash paid for the interest that is capitalized is included in
cash outflows for investing activities instead of cash flows from operating activities. There would be no affect if
the company was producing the asset for sale to others.

P9-10

Supporting computations: Construction costs, (excluding capitalized interest)


2001: $ 6,000,000
2002: $11,460,000
2003: $ 1,800,000

Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]

Average costs, 2001 = $ 3,000,000 [($0 + $6,000,000)  2]

2002 = $12,000,000 [($6,000,000 + $270,000) +


($6,270,000 + $11,460,000)  2]

2003 = $20,000,000 [($6,270,000,000 + $11,460,000 +


$1,370,000) + ($19,100,000 + $1,800,000)  2]

Capitalized interest, 2001 = $3,000,000 x 12% x 9/12a

= $270,000

2002 = ($10,000,000 x 12%) + ($2,000,000 x 8.5%) b

= $1,370,000

2003 = [($10,000,000x12%) + ($10,000,000x8.5%)] x 3/12c

= $512,500

Interest revenue, 2001 = ($10,000,000 - $3,000,000) x 11%

= $770,000

Interest expense, 2001 = ($20,000,000 x 10%) + ($60,000,000 x 8%) +


($10,000,000 x 12%) - $270,000

= $2,000,000 + $4,800,000 + $1,200,000 - $270,000

= $7,730,000

2002 = $2,000,000 + $4,800,000 + $1,200,000 - $1,370,000

= $6,630,000

9-39
2003 = $2,000,000 + $4,800,000 + $1,200,000 - $512,500

= $7,487,500
a
Since activities were suspended for 3 months, interest is only capitalized
for 9 months.

b
$20,000,000 $60,000,000
x 10% + x 8%
$80,000,000 $80,000,000

c
Since the project is completed on March 31, 2003, interest for three months
is capitalized.
P9-10 (continued)

1.Journal entries, 2001:


Construction in Progress 6,000,000
Cash 6,000,000

Cash [($10M - $3M) x 0.11] 770,000


Interest Revenue 770,000

Interest Expense 7,730,000


Construction in Progress 270,000
Cash [($10Mx0.12)+($20Mx0.10)+($60Mx0.08)] 8,000,000

Journal entries, 2002:


Construction in Progress 11,460,000
Cash 11,460,000

Interest Expense 6,630,000


Construction in Progress 1,370,000
Cash 8,000,000

Journal entries, 2003:


Construction in Progress 1,800,000
Cash 1,800,000

Interest Expense 7,487,500


Construction in Progress 512,500
Cash 8,000,000

Power Plant 21,412,500*


Construction in Progress 21,412,500

*$6,000,000 + $270,000 + $11,460,000 + $1,370,000 + $1,800,000 + $512,500

2.If the 3 month suspension was due to an environmental dispute, activities would still be in progress according to
FASB Statement No. 34. Therefore interest for a full year would be capitalized in 2001 ($3,000,000 x 12% =
$360,000) and therefore the journal entry to record the interest payment would be:

9-40
Interest Expense 7,640,000
Construction in Progress 360,000
Cash 8,000,000

P9-11

2001
Jan. 10 Accumulated Depreciation: Machinery 800
Cash (Accounts Payable, etc.) 800
Replacement of motor.

24 Cash 400
Accumulated Depreciation: Machinery 9,000
Loss on Sale of Machinery 600
Machinery 10,000
Sale of machine.

Feb. 3 Loss on Demolition of Building 1,700


Materials Inventory 500
Accumulated Depreciation: Building 25,000
Building 25,000
Cash (Accounts Payable, etc.) 2,200
Demolition of old building.

14 Repair Expense 700


Cash (Accounts Payable, etc.) 700
Repairs to machine.

Mar. 10 Repair Expense 2,000


Cash (Accounts Payable, etc.) 2,000
Repairs due to accident.

19 Machinery 900
Cash (Accounts Payable, etc.) 900
Replacement of motor.

27 Office Fixtures 700


Office Expenses 300
Cash (Accounts Payable, etc.) 1,000
Office rearrangement.

P9-12 (AICPA adapted solution)

1.Adjusting journal entries, December 31, 2001

(1)Buildings 2,000
Machinery and Equipment 2,000
To correct the recording of the cost of
constructing the small storage building.

9-41
(2)Due from Officers 600
Machinery and Equipment 600
To correct the recording of the cost of the
power lawnmower purchased for the personal
use of the president.

P9-12 (continued)
1. (continued)

(3)Accumulated Depreciation: Machinery and Equipment 180


Gain or Loss on Retirement of Machinery and
Equipment 420
Machinery and Equipment 600
To record retirement of damaged fork lift truck
battery; the asset has been depreciated for 3
years at $60 per year.

(4)Prepaid Equipment Rental Expense 180


Equipment Rental Expense 180
Gain or Loss on Retirement of Machinery
and Equipment 40
Machinery and Equipment 320
To remove equipment rental expense and prepayment
from Machinery and Equipment account.

(5)Machinery and Equipment 150


Accumulated Depreciation: Machinery and Equipment 1,500
Gain or Loss on Retirement of Machinery and
Equipment 150
Machinery and Equipment 1,500
To record retirement of Rockwood saw and gain
on sale.

(6)Machinery and Equipment Held for Sale 1,800


Accumulated Depreciation: Machinery and Equipment 2,500
Gain or Loss on Retirement of Machinery and
Equipment 700
Machinery and Equipment 5,000
To record retirement of casting machine and
write-down to its market value.

(7)Machinery and Equipment 6,964


Interest Expense 36
Notes Payable 7,000
To record full cost of baking oven purchased
on installment payment plan and interest
charges paid in December.

(8)Accumulated Depreciation: Machinery and Equipment 240


Depreciation Expense: Machinery and Equipment 240
To correct recording of depreciation:
Recorded by company $2,800
Correct depreciation (2,560) (see schedule C)

9-42
Correction $ 240

P9-12 (continued)

2.Schedules
THE DEWOSKIN COMPANY
Machinery and Equipment Acquisitions
December 31, 2001

(Schedule A)
Burnham grinder $ 1,200
Air compressor 2,500
Electric spot welder 4,500
Baking oven 10,000
Total $18,200

Machinery and Equipment

(Schedule B)

Balance 2001 2001 Balance


12/31/00 Retirements Additions 12/31/01
1990 $ 5,900 $1,500 (5) -- $ 4,400
1991 400 -- -- 400
1992 -- -- -- --
1993 -- -- -- --
1994 3,900 -- -- 3,900
1995 -- -- -- --
1996 5,300 5,000 (6) -- 300
1997 -- -- -- --
1998 4,200 600 (3) -- 3,600
1999 -- -- -- --
2000 5,700 -- -- 5,700
2001 -- -- $18,200 18,200
$25,400 $7,100 $18,200 $36,500

Accumulated Depreciation

(Schedule C)

Balance 2001 2001 Balance


12/31/00 Retirements Provision 12/31/01
1990 $ 5,900 $1,500 (5) -- $ 4,400
1991 380 -- $ 20 400
1992 -- -- -- --
1993 -- -- -- --
1994 2,535 -- 390 2,925
1995 -- -- -- --
1996 2,385 2,500 (6) 280 165
1997 -- -- -- --
1998 1,050 180 (3) 390 1,260

9-43
1999 -- -- -- --
2000 285 -- 570 855
2001 -- -- 910 910
$12,535 $4,180 $2,560 $10,915

P9-13 (AICPA adapted solution)

1.Depreciation Expense: Building 200.00


Accumulated Depreciation: Building 200.00
To record one-half year's depreciation
on old boiler ($10,000 x 4% x 1/2).

2.Building 2,000.00
Gain or Loss on Disposition of Fixed Assets 2,000.00
To correct the recording of insurance recovery.

3.Purchase Discountd 274.40


Fuel Expensea 741.60
Fuel Inventorya 82.40
Accumulated Depreciation: Buildingb 6,200.00
Gain or Loss on Disposition of Fixed Assetsc 2,320.00
Building 9,618.40
To correct the recording of the purchase of
the new boiler and the trade-in of the old.
a
Computation of fuel expense
Fuel oil included in invoice
price of new boiler
(1,000 gallons at $0.80) $800.00
Sales tax at 3% 24.00
Fuel cost $824.00

100
Less: Fuel inventory ($824 x ) (82.40)
1,000
Fuel expense $741.60
b
Computation of accumulated depreciation on building:

$10,000 x 4% x 15½ years = $6,200.00


c
Computation of gain or loss on disposition of fixed assets:

Cost of old boiler $10,000.00


Accumulated depreciation (6,200.00)
Book value at time of explosion $ 3,800.00
Less trade-in allowance
(fair market value) (1,480.00)
Tentative loss on disposition $ 2,320.00
d
Computation of cash discount on purchase of boiler:

Invoice price $16,000.00

9-44
Less: Fuel oil included in
invoice price $ 800.00
Trade-in allowance 1,480.00 (2,280.00)
$13,720.00

Purchases discount at 2% $ 274.40

P9-13 (continued)

4.Building 1,000.00
Repair Expense 1,000.00
To correct the recording of the
cost of installation of the boiler.

5.Depreciation Expense: Buildinge 22.19


Accumulated Depreciation: Building 22.19
To correct recorded depreciation expense
on the building and the new boiler.
e
Cost of building $100,000.00
Less cost of old boiler (depreciation
recorded in entry no. 1) (10,000.00)
Cost subject to full year of depreciation $ 90,000.00

Depreciation at 4% $ 3,600.00
Cost of new boiler $ 16,381.60

Depreciation on new boiler


($16,381.60  9½ x ½) 862.19
(New boiler is depreciated over
remaining life of the buildings)

Total adjusted depreciation $ 4,462.19


Depreciation recorded (4,440.00)
Depreciation adjustment required $ 22.19

Cost of new boiler:

Invoice price $16,000.00


Less: Fuel oil (800.00)
Remainder $15,200.00

Add: Sales tax $ 456.00


Installation 1,000.00 1,456.00
Total $16,656.00
Less: Cash discount (274.40)
Cost of new boiler $16,381.60

9-45
P9-14

1.a.Successful-efforts method: The cost of dry wells (50% x $5 million) is expensed in 2001. The cost of successful
wells (50% x $5 million) is capitalized in 2001 and expensed over the life of the wells.

On the income statement for 2002, cost depletion expense is reported at $250,000 (10% x $2.5 million).

On the 2002 ending balance sheet, the asset is reported at a net value of $2,250,000 (the $2,500,000 cost
less the $250,000 depletion).

b.Full-cost method: The total cost of $5 million is capitalized in 2001.

On the income statement for 2002, cost depletion expense is reported at $500,000 (10% x $5 million).

On the 2002 ending balance sheet, the asset is reported at a net value of $4,500,000 (the $5 million cost less
the $500,000 depletion).

2.Small oil companies generally prefer the full-cost method because it results in higher asset values on the balance
sheet and delaying the recognition of expenses in the income statement.

9-46