Accounting 2 Problems

BE10-1 Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson’s weighted-averaged accumulated expenditures for interest capitalization purposes.

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

BE10-14 Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2011. Depreciation has been recorded at a rate of $2,400 per year, resulting in a balance in accumulated depreciation of $8,400 at December 31, 2014. The machinery is sold on September 1, 2015, for $10,500. Prepare the journal to (a) update for 2015 and (b) record the sale.

E10-2(Acquisition Cost of Realty) Martin Buber purchased land as a factory site for $400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid $42,000 to raze the old buildings and sold salvaged lumber and brick for $6,300. Legal fees of $1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid $2,200 to an engineering firm for a land survey, and $68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost $1,500, and a liability insurance premium paid during construction was $900. The contractor’s charge for construction was $2,740,000. The company paid the contractor in two installments $1,200,000 at the end of 3 months and $1,540,000 upon completion. Interest costs of $170,000 were incurred to finance the construction.


Determine the cost of the land and the cost of the building as they should be recorded  on the books of Martin Buber Co. Assume that the land survey was for the building.

E10-8 (Capitalization of Interest) On December 31, 2013, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2014, the company made the following expenditures related to this building:March 1, 360,000; June 1, $600,000; July 1, $1,500,000; December 1, $1,500,000. The building was completed in February 2015. Additional information is provided as follows.

1.Other debt outstanding 

10 year, 13% bond, December 31, 2007,interest payable annually                        $4,000,000

 6 year, 10% note dated December 31, 2011, interest payable annually.               $1,600,000

2. March 1, 2014, expenditure included land costs $150,000

3. Interest revenue earned in 2014                                                                             $49.000


(a)Determine the amount of interest to be capitalized in 2014 in relation to the construction of the building.

(b)Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2014.

E10-17 (Nonmontetary Exchange) Busytown Corporation, which manufactures shoes, hired  a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before  long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus $340 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine.  Assume the following information about the machines.

                                                   Busytown Corp                Dick Tracy Co    

                                                                         (Old Machine)                 (New Machine)

Machine                                                            $290                                    $270

Accumulated depreciation                                 140                                        -0-

Fair value                                                            85                                      420

Instructions  For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance).

P10-1 (Classification of Acquisition and Other  Assets Costs) At December 31,2013, certain accounts included in the property,plant, and equipment section of Reagan Company’s balance sheet had the following balances.

 Land                                                $230,000

Buildings                                            890,000

Leasehold improvements                   660,000

Equipment                                          875,000

During 2014, the following transactions occured.

1.Land site number 621 was acquired for $850,000. In addition, to acquire the land Reagan paid a $51,000 commission to a real estate agent. Costs of $35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for $13,000.

2.A  second tract of land (site number 622) with a building was acquired for $420,000. The closing statement indicated that the land value was $300,000 and building value was $120,000. Shortly after acquisition, the building was demolished at a cost $41,000. A new building was constructed for $330,000 plus the following costs

Excavation fees                                        38,000

Architectural design fees                          11,000

Building permit fee                                     2,500

Imputed interest on funds used

during construction (stock financing)         8,500

The building was completed and occupied on September 30, 2014.

3.A third tract of land (site number 623) was acquired for $650,000 and was put on the market for resale.

4.During December 2014, costs of $89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2016, and is not expected to be renewed. (Hint:Leasehold improvements should be handled in the same manner as land improvements.)

5.A group of new machine was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was $87,000, freight costs  were $3,300, installation costs were $2,400, and royalty payments for 2014 were $17,500.


(a)Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2014.

Land                                    Leasehold improvements

Buildings                              Equipment

(b)List all the items in the situations that were not used to determine the answer to (a) above, and and indicate where, or if, these items should be included in Reagan’s financial statements.


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