EXERCISE 10-7

(a)

Avoidable Interest
Weighted-Average
Accumulated Expenditures

X Interest Rate = Avoidable Interest

2,000,000
1,800,000
3,800,000

12%
10.38%

240,000
186,840
426,840

Capitalization rate computation

Principal

Interest

10% short-term loan

11% long-term loan

1,600,000

160,000
110,000

1,000,000
2,600,000
Total Interest
Total Principal
(b)
Construction loan
Short-term loan
Long-term loan

270,000

270,000
= 10.38%
2,600,000

Actual Interest
2,000,000 X 12% =
1,600,000 X 10% =
1,000,000 X 11% =
Total

240,000
160,000
110,000
510,000

Because avoidable interest is lower than actual interest, use avoidable

interest.
Cost
5,200,000
Interest capitalized
426,840
Total cost
5,626,840
Depreciation Expense = 5,626,840 300,000 = 177,561
30 years
EXERCISE 10-18
(a)

Exchange has commercial substance:

Depreciation Expense .......................................
Accumulated DepreciationEquipment
(12,700 700 = 12,000;
12,000 5 = 2,400;
2,400 X 4/12 = 800)

800
800

Equipment .........................................................
Accumulated DepreciationEquipment .........
Gain on Disposal of Equipment ..............
Equipment ................................................
Cash ..........................................................

*Cost of old asset

Accumulated depreciation
(7,200 + 800)
Book value
Fair value of old asset
Gain (on disposal of plant asset)

(8,000)
4,700
5,200
500
10,000
5,200
15,200

Exchange lacks commercial substance:

Depreciation Expense .......................................
Accumulated DepreciationEquipment
Equipment .........................................................
Accumulated DepreciationEquipment .........
Equipment ................................................
Cash ..........................................................
**Cash paid
Fair value of old asset
Less: Gain deferred (5,200
4,700)
Cost of new asset

EXERCISE 10-25
(a)
(c)
(e)
(g)

C
C
C
C

(b)
(d)
(f)
(h)

E, assuming immaterial
C
E
C

500*
12,700
10,000

12,700

**Cash paid
Fair value of old melter
Cost of new melter
(b)

15,200**
8,000

800
800
14,700**
8,000
12,700
10,000
10,000
5,200
500
14,700

EXERCISE 10-27
April 1 Cash
.......................................................................
.......................................................................
Accumulated DepreciationBuildings .......
Land ......................................................
Buildings ..............................................
Gain on Disposal of Plant Assets .......

410,000

160,000
60,000
280,000
230,000*

*Computation of gain:
Book value of land
$ 60,000
Book value of building
($280,000 $160,000)
(120,000)
Book value of land and building 180,000
Cash received
410,000
Gain on disposal
$230,000
Aug. 1 Land ...............................................................
Buildings .......................................................
Cash .....................................................

90,000
380,000
470,000

EXERCISE 11-6
(a)

2015 Straight-line

$304,000 $16,000
= $36,000/year
8

3 monthsDepreciation ($36,000 X 3/12) = $9,000

(b)

2015 Output

$304,000 $16,000
= $7.20/output unit
40,000

1,000 units X $7.20 = $7,200

(c)

2015 Working hours

$304,000 $16,000
20,000

= $14.40/hour

525 hours X $14.40 = $7,560

(d)

8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36 OR

n(n + 1)
2

8(9)
2

= 36

Allocated to
Sum-of-the-years-digits
Year 1 8/36 X $288,000 =
2 7/36 X $288,000 =
3 6/36 X $288,000 =

Total
$64,000
$56,000
$48,000

2015
$16,000

$16,000

2016
$48,000
14,000
$62,000

2017
$42,000
12,000
$54,000

2017: $54,000 = (9/12 of 2nd year of machines life plus 3/12 of 3rd year of
machines life)
(e)

Double-declining-balance 2016: 1/8 X 2 = 25%.

2015: 25% X $304,000 X 3/12 = $19,000
2016: 25% X ($304,000 $19,000) = $71,250
OR
1st full year (25% X $304,000) = $76,000
2nd full year [25% X ($304,000 $76,000)] = $57,000
2015 Depreciation 3/12 X $76,000 = $19,000
2016 Depreciation 9/12 X $76,000 = $57,000
3/12 X $57,000 = 14,250
$71,250

EXERCISE 11-11
(a)

No correcting entry is necessary because changes in estimate are

handled in the current and prospective periods.

(b)

Revised annual charge

Book value as of 1/1/2016 [$52,000 ($6,000 X 5)] = $22,000
Remaining useful life, 5 years (10 years 5 years)
Revised residual value, $4,500
($22,000 $4,500) 5 = $3,500
Depreciation Expense ............................................
Accumulated DepreciationEquipment .....

3,500
3,500

EXERCISE 11-14
(a)

(b)

Maintenance and Repairs Expense..................

Equipment ................................................

500

The proper ending balance in the asset account is:

January 1 balance ....................................
Add: New equipment:
Purchases ......................................
32,000
Freight ............................................
700
Installation .....................................
2,500
Less: Cost of equipment sold...............
December 31 balance...............................

500

133,000

35,200
23,000
145,200

(1) Straight-line: 145,200 10 = 14,520

(2) Sum-of-the-years-digits: 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 55
OR

n(n + 1)
2

10(11)
= 55
2

For equipment purchased in 2014: 110,000 (133,000 23,000) of the

cost of equipment purchased in 2014, is still on hand.
8/55 X 110,000 =......................................................
16,000
For equipment purchased in 2016: 10/55 X 35,200 = ....
6,400
Total ..........................................................................
22,400