AccL 302

Leslle oole
ChapLer 10 Pomework



; WhaL are Lhe ma[or characLerlsLlcs of planL asseLs?
1he Lhree ma[or characLerlsLlcs of planL asseLs are
11hey are acqulred for use ln operaLlons and noL for resale
2 1he are longLerm ln naLure and usually depreclaLed
3 1hey possess physlcal subsLance

; 1o whaL exLenL do you conslder Lhe followlng lLems Lo be proper cosLs of Lhe flxed asseL? Clve
reasons for your oplnlons
a) Cverhead of a buslness LhaL bullds lLs own equlpmenL

WlLh selfconsLrucLed asseLs companles can handle Lhe lndlrecL cosL of overhead by elLher leavlng lL ouL
all LogeLher or by asslgnlng a porLlon of all overhead Lo Lhe consLrucLlon process 1hls ls oLherwlse
known as Lhe full cosLlng approach ln my oplnlon leavlng off Lhe cosL of Lhe overhead does noL glve
Lhe company an accuraLe plcLure of Lhe full cosL of Lhose asseLs lL seems reasonable Lo asslgn a porLlon
of Lhe flxed overhead Lo Lhe asseL Lo deLermlne lLs Lrue cosL

b) Cash dlscounLs on purchases of equlpmenL

lf Lhe company Lakes Lhe dlscounL Lhey should reduce Lhe purchase prlce of Lhe asseL

Cash dlscounLs on purchases of equlpmenL Some accounLanLs LreaL all cash dlscounLs as flnanclal or oLher revenue regardless
of wheLher Lhey arlse from Lhe paymenL of lnvolces for merchandlse or planL asseLs CLhers Lake Lhe poslLlon LhaL only Lhe neL
amounL pald for planL asseLs should be caplLallzed on Lhe basls LhaL Lhe dlscounL represenLs a reducLlon of prlce and ls noL
lncome 1he laLLer poslLlon seems more loglcal ln llghL of Lhe facL LhaL planL asseLs are purchased for use and noL for sale and
LhaL Lhey are wrlLLen off Lo expense over a long perlod of Llme

c) lnLeresL pald durlng consLrucLlon of a bulldlng

1o properly accounL for Lhe lnLeresL lncurred durlng consLrucLlon l Lhlnk Lhe proper meLhod ls Lo
caplLallze only Lhe acLual lnLeresL cosLs lncurred durlng consLrucLlon CAA also recommends Lhls same
course of acLlon lnLeresL ls a leglLlmaLe cosL [usL llke labor and maLerlals are durlng consLrucLlon


d) CosL of a safeLy devlce lnsLalled on a machlne

1he cosL of a safeLy devlce should be lncluded ln Lhe cosL of Lhe flxed asseL 1he safeLy devlce would be
consldered an addlLlon and LhaL falls under one of Lhe ma[or Lypes of expenses relaLlve Lo exlsLlng
asseLs

e) lrelghL on equlpmenL reLurned before lnsLallaLlon for replacemenL by oLher equlpmenL of greaLer
capaclLy

1hls seems llke a leglLlmaLe cosL as a company ls ln Lhe process of replaclng equlpmenL l can see Lhe
need for changes and ad[usLmenLs along Lhe way (Lx We no longer need such and such Lhls
equlpmenL ls no longer compaLlble we need someLhlng dlfferenL Lhan we orlglnally LhoughL eLc)

f) CosL of movlng machlnery Lo a new locaLlon

1he flrsL conslderaLlon would be wheLher movlng Lhe machlnery creaLed a slgnlflcanL cosL or noL (Lx lf
Lhe company had Lo roll lL across Lhe room or dld Lhey have Lo dlsassemble lL and reconsLrucL lL ln a
new locaLlon) lf Lhe cosL ls slgnlflcanL and a fuLure beneflL can be foreseen Lhe cosL of rearrangemenL
and relnsLallaLlon should be lncluded ln Lhe cosL of Lhe asseL
normally only Lhe cosL of one lnsLallaLlon should be caplLallzed for any plece of equlpmenL 1hus Lhe
orlglnal lnsLallaLlon and any accumulaLed depreclaLlon relaLlng LhereLo should be removed from Lhe
accounLs and Lhe new lnsLallaLlon cosLs (le cosL of movlng) should be caplLallzed

g) CosL of plywood parLlLlons erecLed as parL of Lhe remodellng of Lhe offlce

1he plywood parLlLlons would be consldered an lmprovemenL and an approprlaLe expendlLure relaLlve
Lo exlsLlng asseLs

h) 8eplasLerlng of a secLlon of Lhe bulldlng

8eplasLerlng a secLlon of Lhe bulldlng would fall under Lhe caLegory of ordlnary repalrs Lo malnLaln
planL asseLs ln operaLlng condlLlons A ordlnary repalr would be llsLed under operaLlng expenses noL a
cosL

l) CosL a new moLor for one of Lhe Lrucks

A new moLor ls a proper cosL of a flxed asseL because LhaL would be consldered a ma[or repalr Crdlnary
repalrs and malnLenance are normally consldered parL of operaLlng expenses A new moLor would mosL
llkely exLend Lhe llfe of Lhe Lruck and should be llsLed an lmprovemenL cosL on Lhe asseL

A more approprlaLe LreaLmenL ls Lo remove Lhe cosL of Lhe old moLor and relaLed depreclaLlon and add
Lhe cosL of Lhe new moLor lf posslble

; nevlllle has a number of fully depreclaLed asseLs LhaL are sLlll belng used 8ecause Lhey are fully
depreclaLed Lhe presldenL decldes noL Lo show Lhem on Lhe balance sheeL or dlsclose Lhls lnfo ln Lhe
noLes LvaluaLe Lhls procedure

1hls pracLlce does noL seem approprlaLe or eLhlcal An lnvesLor would wanL Lo know LhaL Lhe equlpmenL
ln quesLlon ls sLlll ln use by Lhe company uepreclaLlon ls an esLlmaLe of cosL allocaLlon and noL a
process of valuaLlon Lven lf Lhe equlpmenL ls fully depreclaLed a dlsclosure ln Lhe noLes would be
helpful Lo fuLure lnvesLors because Lhese asseLs sLlll have value 1he LexL lndlcaLes anoLher rouLe lf an
asseL can sLlll be used even Lhough lL ls fully depreclaLed lL may be kepL on Lhe books aL hlsLorlcal cosL
less depreclaLlon (pg 312)

AcqulslLlon CosLs of 8ealLy

lLem Land Land lmprovemenLs 8ulldlng CLher AccounLs
a (273000) (273000) noLes payable

b $273000
c $10000
d $7000
e $6000
f ($1000)
g $23000
h $200000$230000 $30000
l $9000
[ $4000
k $11000
l ($3000)
m $13000
n $19000
o $14000 $14000
p $3000

CaplLallzaLlon of lnLeresL

a)CalculaLe Lhe lnLeresL revenue welghLedaverage accumulaLed expendlLures avoldable lnLeresL and
LoLal lnLeresL cosL Lo be caplLallzed durlng 2010

SLep 1 compototloo of welqbteJovetoqe occomoloteJ expeoJltotes A company welghs Lhe
expendlLures by Lhe amounL of Llme LhaL lL can lncur lnLeresL cosL on each one
LxpendlLures
CaplLallzaLlon WelghLedAverage
uaLe AmounL x erlod AccumulaLed LxpendlLures
March 1 360000 10/12 300000
!une 1 600000 7/12 330000
!uly 1 1300000 6/12 730000
uecember 1 1200000 1/12 100000
$3660000 $1300000

SLep 2 compototloo of ovolJoble lotetest

WelghLedAverage
AccumulaLed LxpendlLures x lnLeresL 8aLe Avoldable lnLeresL
$1300000 12 (consLrucLlon noLe) $180000

SLep 3 compototloo of Actool lotetest Lhls represenLs Lhe maxlmum amounL of lnLeresL LhaL lL may
caplLallze durlng 2010

ConsLrucLlon noLe $3000000 x 12 $360000
10 year bond $4000000 x 11 $440000
6 year noLe $1600000 x 10 $160000
$960000
1he |nterest cost that nuston Inc w||| cap|ta||ze |s the |esser of avo|dab|e |nterest or actua|
|nterest Avo|dab|e |nterest at 5 |s the |ower amount

b) repare [ournal enLry Lo record Lhe caplLallzaLlon of lnLeresL and Lhe recognlLlon of lnLeresL expense
lf any aL uec 31 2010

!ournal

8ulldlng (caplLallzed lnLeresL) $180000
lnLeresL Lxpense $780000
Cash (360k +440k +160k) $960000

AcLual lnLeresL $960000
Less CaplLallzed lnLeresL 180000
lnLeresL expense $780000


Analysls of SubsequenL LxpendlLures

uurlng Lhe currenL year Lhe followlng expendlLures were made Lo Lhe planL faclllLy lndlcaLe how each
of Lhese LransacLlons would be recorded ln Lhe accounLlng records

a) 8ecause of lncreased demands for lLs producL Lhe company lncreased lLs planL capaclLy by bulldlng a
new addlLlon aL a cosL of $270000

A new addlLlon Lo Lhe planL wlll be caplLallzed CosLs lncurred Lo achleve greaLer fuLure beneflLs should
be caplLallzed and a new addlLlon wlll provlde fuLure beneflLs

b) 1he enLlre planL was repalnLed aL a cosL of $23000

8epalnLlng Lhe enLlre planL would be consldered an ordlnary repalr A palnL [ob wlll noL achleve any
fuLure beneflLs LxpendlLures LhaL slmply malnLaln a glven level of servlces should be expensed

c) 1he roof was asbesLos lor safeLy lL was removed and replaced for $61000 8ook value of old roof
was $41000
1he LexL sLaLes LhaL Lhe proper procedure ls Lo remove Lhe book value of Lhe old roof and subsLlLuLe lL
wlLh Lhe cosL of Lhe new roof lL ls hard Lo deLermlne lf replaclng Lhe roof exLended fuLure llfe of Lhe
bulldlng Lhough mosL roof replacemenLs do exLend Lhe llfe of a bulldlng 1hls seemed Lo be more of a
case of worker safeLy 1he problem dld noL lndlcaLe LhaL Lhe roof needed Lo be replaced

d) LlecLrlcal sysLem updaLed for $22000 CosL of old sysLem noL known useful llfe of bulldlng wlll noL
change wlLh Lhls lmprovemenL

Slnce Lhe elecLrlcal sysLem does noL lncrease Lhe useful llfe of Lhe bulldlng Lhls ls an expendlLure done
Lo malnLaln Lhe bulldlng and Lherefore added Lo Lhe cosL of Lhe bulldlng

6onceptua||y, the book va|ue of the o|d e|ectr|ca| system shou|d be removed. however, pract|ca||y |t |s often d|ff|cu|t |f not
|mposs|b|e to determ|ne th|s amount. |n th|s case, one of two approaches |s fo||owed. 0ne approach |s to cap|ta||ze the rep|acement on the
theory that suff|c|ent deprec|at|on was taken on the o|d system to reduce the carry|ng amount to a|most zero. A second approach |s
to deb|t Accumu|ated 0eprec|at|on on the theory that the rep|acement extends the usefu| ||fe of the asset and thereby recaptures some or
a|| of the past deprec|at|on. |n our present s|tuat|on, the prob|em spec|f|ca||y states that the usefu| ||fe |s not extended and therefore
deb|t|ng Accumu|ated 0eprec|at|on |s |nappropr|ate. Thus, th|s expend|ture shou|d be added to the cost of the p|ant fac|||ty.

e) Ma[or repalrs made for $47000 because parLs of Lhe wood sLrucLure were roLLlng CosL of old
sLrucLure noL known 1hese repalrs are esLlmaLed Lo lncrease Lhe useful llfe of Lhe bulldlng

Ma[or repalrs Lo Lhe bulldlng wlll mosL llkely lncrease Lhe useful llfe of Lhe bulldlng and Lherefore Lhese
cosLs should be caplLallzed A deblL Lo AccumulaLed uepreclaLlon would appear Lo be Lhe mosL
approprlaLe



9 ulsposlLlons lncludlng CondemnaLlons uemollLlons and 1radeln

lndlcaLe how Lhese lLems would be reporLed on Lhe lncome sLaLemenL of PollerlLh Co

Land

8ulldlng

Warehouse

Machlne

lurnlLure

AuLomoblle

l was confused on how Lo compleLe Lhls quesLlon l wasnL sure lf you were looklng for [ournal enLrles or
explanaLlons l checked selecLed soluLlons for furLher lnformaLlon

9 nonmoneLary Lxchanges

lor each of Lhe four lndependenL slLuaLlons prepare Lhe [ournal enLrles Lo record Lhe exchange on Lhe
books of each company

Companles accounL for Lhe exchange of nonmoneLary asseLs on Lhe basls of Lhe falr value of Lhe asseL
glven up or Lhe falr value of Lhe asseL recelved whlchever ls clearly more evldenL 1hus companles
should recognlze lmmedlaLely any galns or losses on Lhe exchange

1 uorseLL Co offered Lo exchange a slmllar machlne plus $23000 (1he exchange has commerclal
subsLance for boLh parLles)

compototloo of loss oo ulsposol of useJ MocbloenolyflelJco

8ook value of used machlne $100000
lalr value of used machlne ($92000)
Loss on dlsposalused machlne $ 8000

now tbe ttoosoctloo woolJ be tepotteJ
Polyfleld Co
Cash 23000
Machlne 69000
AccumulaLed uepreclaLlon 60000
Loss on dlsposal used machlne 8000
Machlne 160000

compototloo of loss oo ulsposol of useJ Mocbloeuotsett co

8ook value of used machlne $73000
lalr value of used machlne ($69000)
Loss on dlsposalused machlne $ 6000

now tbe ttoosoctloo woolJ be tepotteJ
uorseLL Co
Machlne 92000
AccumulaLed uepreclaLlon 43000
Loss on dlsposal used machlne 6000
Cash 23000
Machlne 120000

2 WlnsLon Co offered Lo exchange a slmllar machlne (1he exchange lacks commerclal subsLance for
boLh parLles)
compototloo of loss oo ulsposol of useJ MocbloenolyflelJco (some os obove)

now tbe ttoosoctloo woolJ be tepotteJ
Polyfleld Co
Machlne 92000
AccumulaLed uepreclaLlon 60000
Loss on dlsposal used machlne 8000
Machlne 160000

compototloo of Colo oo ulsposol of useJ Mocbloewlostoo co

lalr value of used machlne $92000
8ook value of used machlne ($81000)
Caln deferred $ 11000

now tbe ttoosoctloo woolJ be tepotteJ
WlnsLon Co
Machlne (9200011000) 81000
AccumulaLed uepreclaLlon 71000
Machlne 132000

3 LlsLon Co offered Lo exchange a slmllar machlne buL wanLed $3000 ln addlLlon Lo Polyflelds
machlne (1he exchange has commerclal subsLance for parLles)

compototloo of loss oo ulsposol of useJ MocbloenolyflelJco (some os obove)

now tbe ttoosoctloo woolJ be tepotteJ
Polyfleld Co
Machlne 93000
AccumulaLed uepreclaLlon 60000
Loss on dlsposal used machlne 8000
Machlne 160000
Cash 3000

compototloo of Colo oo ulsposol of useJ Mocbloellstoo co

lalr value of used machlne $93000
8ook value of used machlne ($83000)
Caln $ 10000

now tbe ttoosoctloo woolJ be tepotteJ
LlsLon Co
Machlne 92000
AccumulaLed uepreclaLlon 73000
Cash 3000
Machlne 160000
Caln on dlsposal of machlne 10000 *noL deferred due Lo havlng commerclal subsLance

4 Polyfleld conLacLed Creeley co a dealer ln machlnes 1o obLaln a new machlne Polyfleld musL pay
$93000 ln addlLlon Lo Lradlng ln lLs old machlne

compototloo of loss oo ulsposol of useJ MocbloenolyflelJco (some os obove)

now tbe ttoosoctloo woolJ be tepotteJ
Polyfleld Co
Machlne 183000
AccumulaLed uepreclaLlon 60000
Loss on dlsposal used machlne 8000
Machlne 160000
Cash 93000

now tbe ttoosoctloo woolJ be tepotteJ
Creeley Co
Cash 93000
Machlne used machlne lnvenLory 92000
Sales 183000

CosL of goods sold 130000
lnvenLory 130000

A AccounLlng for SelfConsLrucLed AsseLs

a) ln general whaL cosLs should be caplLallzed for selfconsLrucLed equlpmenL?

1he cosL of maLerlals and dlrecL labor used ln consLrucLlon are easy Lo deLermlne and should be
caplLallzed 1he lndlrecL cosLs overhead (llghLs power heaL Laxes eLc) are more challenglng Lo
deLermlne buL Lhe percenLage of Lhose cosLs relaLed Lo Lhe consLrucLlon process can also be caplLallzed
lLs [usL more sub[ecLlve

b) ulscuss Lhe proprleLy of lncludlng ln Lhe caplLallzed cosL of selfconsLrucLed asseLs
1) 1he lncrease ln overhead caused by Lhe selfconsLrucLlons of flxed asseLs
1he LexL sLaLes LhaL slnce Lhose cosLs are flxed Lhey do noL lncrease as a resulL of consLrucLlng
ones own equlpmenL 1hls approach assumes LhaL Lhe company would have Lhe same cosLs
regardless

2) A proporLlonaLe share of overhead on Lhe same basls as LhaL applled Lo goods manufacLured
for sale
1he LexL sLaLes Lhls ls known as a fullcosLlng approach whlch aLLaches cosLs Lo all producLs
manufacLured or consLrucLed 1he company asslgns a porLlon of all overhead Lo Lhe
consLrucLlon process as lL would Lo normal producLlon

c) ulscuss proper accounLlng LreaLmenL of Lhe $273000 by whlch Lhe cosL of Lhe flrsL machlne exceeded
Lhe cosL of Lhe subsequenL machlnes 1he addlLlonal cosL should noL be consldered research and
developmenL cosLs

lm noL sure how Lo reporL an evenL llke Lhls l donL know why Lhe flrsL machlne would cosL more Lhan
subsequenL machlnes Changes ln Lhe prlce of supplles?
ll cou|d oe argued lral oecause cosls ol deve|oprerl are usua||y r|grer or lre l|rsl leW ur|ls, lre add|l|ora| cosls ol
S2Z3,000 srou|d oe a||ocaled lo a|| lour racr|res. ll lrese cosls are due lo |rell|c|ercy ard rol deve|oprerl cosls,
lre add|l|ora| cosls srou|d oe expersed.