E 10-17

Alatorre Corporation

Machine 405

Accumulated Depreciation 140

Loss on Disposal of Machine 65

Machine 290

Cash 320

Computation of loss:

Book Value of old machine €150

Fair value of old machine (85)

Loss on disposal 65

Mills Business Machine Company

Cash 320

Inventory 85

Cost of Good Sold 270

Sales 405

Inventory 270

P 10-7

(capitalization of interest) laseewords inc. is a book distributor that had been operation in its original facility
1985. Then increase in certification programs and continuing education requipments in several professions
has contributed to an annual growth rate of 15% for laserwords since 2005. Laserword original facility
became obsolete by erly 2010 because of the increased sales volume and the fact that laserword now
carries tapes and disks in addition to books.

On june 1, 2010, laserword contracted with black construction to have a new building contructed for
$4,000,000 on land owned by laserword. The payments made by laserword to black construction are show
in the schedule below.

Date Amount

July 30, 2010 $ 900,000

January 30, 2011 1,500,000

May 30, 2011 1,600.000

Total payments $4,000,000

Construction was completed and the building was ready for occupancy on may 27, 2011. Laserwords had
no new borrowings directly associated with the new building but had the following debt outstanding at
may 31, 2011, the end of its fiscal year.

 10%, 5-year note payable of $2,000,000 , dated april 1, 2007, with interest payable annually on
april 1.
 12%, 10-year bond issue of $3,000,000 sold at par on june 30, 2003, with interest payable annually
on june 30.

The new building qualifies for interest capitalization. The effect capitalizing the interest on the new building
, compared with the effect of expensing the interest, is material.

Instructions

a) Compute the wighted-average accumulated expenditure on laserwords new building during the
capitalization period.
b) Compute the avoidable interest on laserwords new building
c) Some interest cost of laserwords Inc. is capitalized for the ended may 31,2011
1) Indentify the items relating costs that must be disclosed in laserwords financial statements
2) Compute the amount of each of the items that must be disclosed
(a) Computation of Weighted-Average Accumulated Expenditures

Expenditures

Date Amount X Capitalization Weighted-Average

Period = Accumulated Expenditures

July 30, 2010 $ 900,000 10/12 $ 750,000

January 30, 2011 1,500,000 4/12 500,000

May 30, 2011 1,600,000 0 0

$4,000,000 $1,250,000

(b)

Weighted-Average Capitalization Avoidable

Accumulated Expenditures X Rate = interest

$1,250,000 X 11.2%* = $140,000

Loans Outstanding During Construction Period

Principal Actual Interest

*10% five-year note $2,000,000 $200,000

12% ten-year bond 3,000,000 360,000

$5,000,000 $560,000
  Capitalization rate = Total interest ÷ Total principal

= 560,000 ÷ 5,000,000

= 11.2% (capitalization rate

(a) (1) and (2)

Total actual interest cost $560,000

Total interest capitalized $140,000

Total interest expensed $420,000

E11-24

December 31, 2010

Land 20,000
Unrealized Gain on Revaluation—Land 20,000

December 31, 2011

Unrealized Gain on Revaluation—Land 20,000
Loss on Impairment 20,000
Land 40,000

December 31, 2012

Land 25,000
Recovery of Impairment Loss 20,000
Unrealized Gain on Revaluation—Land 5,000
E11-27 (Revaluation Accounting)

Falcetto Company acquired equipment on January 1, 2009, for $12,000. Falcetto elects to value this class
of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis
over its-6-year useful lie. There is no residual value at the end of 6-year period. The appraised value of the
equipment approximates the carrying amount at December 31, 2009 and 2011. On December 31, 2010,
the fair value of the equipment is determined to be $7,000.

Instructions :

(a) Prepare the journal entries for 2009 related to the equipment

(b) Prepare the journal entries for 2010 related to the equipment

(c) Determine the amount of depreciation expense that Falcetto will record on the equipment in 2011

Anwers :

(a) January 1, 2009

Equipment........................................................ 12,000

Cash ....................................................................................12,000

December 31, 2009

Depreciation Expense ...................................... 2,000

Accumulated Depreciation-Equipment............................... 2,000

(b) December 31, 2010

Depreciation Expense ...................................... 2,000

Accumulated Depreciation-Equipment............................... 2,000

Accumulated Depreciation-Equipment ............ 4,000

 Loss on Impairment ......................................... 1,000

Equipment .......................................................................... 5,000

(c) Depreciation Expense-2011 : ($12,000 - $5,000) / 4 = $1,750