Question & Answer

Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2013, had the following balances.

Land $ 300,000

Land improvements 140,000

Buildings 1,100,000

Equipment 960,000

During 2014, the following transactions occurred.

1. A tract of land was acquired for $150,000 as a potential future building site.

2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of $37 per share on a national stock exchange. The plant facility was carried on

Mendota’s books at $110,000 for land and $320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are $230,000 and $690,000.

3. Items of machinery and equipment were purchased at a total cost of $400,000. Additional costs were incurred as follows.

Freight and unloading $13,000

Sales taxes 20,000

Installation 26,000

4. Expenditures totaling $95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.

5. A machine costing $80,000 on January 1, 2006, was scrapped on June 30, 2014. Double-decliningbalance depreciation has been recorded on the basis of a 10-year life.

6. A machine was sold for $20,000 on July 1, 2014. Original cost of the machine was $44,000 on January

1, 2011, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of $2,000.

Instructions

(Round to the nearest dollar.)

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

Land Buildings

Land Improvements Equipment

(Hint: Disregard the related accumulated depreciation accounts.)

(b) List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.

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 occurred.

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 the building value was $120,000. Shortly after acquisition, the building was demolished at a cost of $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 fi nancing) 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 machines 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.

Instructions

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

Land Leasehold Improvements

Buildings Equipment

Disregard the related accumulated depreciation accounts.

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

On April 1, 2014, Gloria Estefan Company received a condemnation award of $430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost $60,000 and $280,000, respectively, when they were acquired. At April 1, 2014, the accumulated depreciation relating to the building amounted to $160,000. On August 1, 2014, Estafan purchased a piece of replacement property for cash. The new land cost $90,000, and the new building cost $400,000.

Instructions

Prepare the journal entries to record the transactions on April 1 and August 1, 2014.

On December 31, 2014, Travis Tritt Inc. has a machine with a book value of $940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine $1,300,000

Less: Accumulated depreciation 360,000

Book value $ 940,000

Depreciation is computed at $60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

(a) A fire completely destroys the machine on August 31, 2015. An insurance settlement of $430,000 was received for this casualty. Assume the settlement was received immediately.

(b) On April 1, 2015, Tritt sold the machine for $1,040,000 to Dwight Yoakam Company.

(c) On July 31, 2015, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.

Instructions

For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed

(E) in the period incurred.

(a) __________ Improvement.

(b) __________ Replacement of a minor broken part on a machine.

(c) __________ Expenditure that increases the useful life of an existing asset.

(d) __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.

(e) __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.

(f) __________ Expenditure that increases the quality of the output of the productive asset.

(g) __________ Improvement to a machine that increased its fair market value and its productioncapacity by 30% without extending the machine’s useful life.

(h) __________ Ordinary repairs.

The following transactions occurred during 2014. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.

Jan. 30 A building that cost $132,000 in 1997 is torn down to make room for a new building. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged.

Mar. 10 Machinery that was purchased in 2007 for $16,000 is sold for $2,900 cash, f.o.b. purchaser’s plant. Freight of $300 is paid on the sale of this machinery.

Mar. 20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost of $2,000. The replacement does not extend the useful life of the machine but does make the machine more effi cient.

May 18 A special base installed for a machine in 2008 when the machine was purchased has to be replaced at a cost of $5,500 because of defective workmanship on the original base. The cost of the machinery was $14,200 in

2008. The cost of the base was $3,500, and this amount was charged to the Machinery account in 2008.

June 23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was constructed in 2010.

Instructions

(Round to the nearest dollar.)

Prepare general journal entries for the transactions.

King Donovan Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company’s plant asset book value is currently $800,000, as indicated below.

Original cost $1,200,000

Accumulated depreciation 400,000

Book value $ 800,000

During the current year, the following expenditures were made to the plant facility.

(a) Because of increased demands for its product, the company increased its plant capacity by building a new addition at a cost of $270,000.

(b) The entire plant was repainted at a cost of $23,000.

(c) The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of $61,000. Book value of the old roof was $41,000.

(d) The electrical system was completely updated at a cost of $22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.

(e) A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of $8,000 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid $8,000 cash and traded in used equipment. The used equipment had originally cost $62,000; it had a book value of $42,000 and a secondhand fair value of $47,800, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of $1,100.

Instructions

(a) Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.

(b) Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable, prepare the general journal entry to record this transaction.

Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company.

The following information pertains to the exchange.

Carlos Arruza Co. Tony LoBianco Co.

Equipment (cost) $28,000 $28,000

Accumulated depreciation 19,000 10,000

Fair value of equipment 12,500 15,500

Cash given up 3,000

Instructions

(a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.

(b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Cannondale Company purchased an electric wax melter on April 30, 2014, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter $15,800

Cash paid 10,000

Cost of old melter (5-year life, $700 salvage value) 11,200

Accumulated depreciation—old melter (straight-line) 6,300

Secondhand fair value of old melter 5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2013.

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 cost $290 $270

Accumulated depreciation 140 –0–

Fair value 85 425

Instructions

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

Cardinals Corporation purchased a computer on December 31, 2013, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2014. An assumed interest rate of

10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

(a) Prepare the journal entry(ies) at the date of purchase.

(b) Prepare the journal entry(ies) at December 31, 2014, to record the payment and interest (effectiveinterest method employed).

(c) Prepare the journal entry(ies) at December 31, 2015, to record the payment and interest (effectiveinterest method employed).

E10-16 (Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following informationwas gathered.

Depreciation to

Initial Cost on Date on Seller’s Book Value on

Description Seller’s Books Books Seller’s Books Appraised Value

Machinery $100,000 $50,000 $50,000 $90,000

Equipment 60,000 10,000 50,000 30,000

Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900.

Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.)

Facts concerning the trade-in are as follows.

Cost of machinery traded $100,000

Accumulated depreciation to date of sale 40,000

Fair value of machinery traded 80,000

Cash received 10,000

Fair value of machinery acquired 70,000

Asset 5: Equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market price of $11 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of $150,000.

Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.

Date Payment

2/1 $120,000

6/1 360,000

9/1 480,000

11/1 100,000

To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1.

The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%.

Instructions

Record the acquisition of each of these assets.

Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note.

Instructions

(Round to nearest dollar in all computations.)

(a) Prepare the journal entry(ies) at the date of purchase.

(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.

(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.

(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note.

Instructions

(Round to nearest dollar in all computations.)

(a) Prepare the journal entry(ies) at the date of purchase.

(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.

(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.

(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry Anecessary to record depreciation in the first year. (Straight-line depreciation is employed.)

Presented below is information related to Zonker Company.

1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:

Land $ 400,000

Buildings 1,200,000

Equipment 800,000

Total $2,400,000

Zonker Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market price of $168 per share on the date of the purchase of the property.

2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building.

Repairs to building $105,000

Construction of bases for equipment to be installed later 135,000

Driveways and parking lots 122,000

Remodeling of offi ce space in building, including new partitions and walls 161,000

Special assessment by city on land 18,000

3. On December 20, the company paid cash for equipment, $260,000, subject to a 2% cash discount, and freight on equipment of $10,500.

Instructions

Prepare entries on the books of Zonker Company for these transactions.

Question:

Below are transactions related to

Duffner Company.

(a) The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be $81,000.

(b) 13,000 shares of common stock with a par value of $50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of $810,000, of which $180,000 has been allocated to land and $630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at $65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at $58 per share.

(c) No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year.

The following information is given relative to costs of the machinery constructed.

Materials used $12,500

Factory supplies used 900

Direct labor incurred 15,000

Additional overhead (over regular) caused by construction 2,700 of machinery, excluding factory supplies used Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost

Cost of similar machinery if it had been purchased from outside suppliers 44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

(a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.

(b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade.

(The exchange has commercial substance.)

(c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase.

The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.

Instructions

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

The following three situations involve the capitalization of interest.

Situation I: On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2014, to finance the construction cost, Oksana Baiul borrowed $4,000,000 payable in 10 annual installments of $400,000, plus interest at the rate of 10%. During 2014,

Oksana Baiul made deposit and progress payments totaling $1,500,000 under the contract; the weightedaverage amount of accumulated expenditures was $800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $250,000.

Instructions

What amount should Oksana Baiul report as capitalized interest at December 31, 2014?

Situation II: During 2014, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

Interest Costs Incurred Warehouse constructed for Ito’s own use $30,000

Special-order machine for sale to unrelated customer, produced according to customer’s specifi cations 9,000 Inventories routinely manufactured, produced on a repetitive basis 8,000

All of these assets required an extended period of time for completion.

Instructions

Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2014, Peggy Fleming borrowed $10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2015, expenditures for the partially completed structure totaled $7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $650,000 for the year.

Instructions

How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2015?

On July 31, 2014, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2014. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31.

$200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On

November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to Netherlands,

Amsterdam’s only outstanding liability at December 31, 2014, is a $30,000, 8%, 6-year note payable, dated January 1, 2011, on which interest is payable each December 31.

Instructions

(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2014. (Round all computations to the nearest dollar.)

(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

(1) July 31, 2014.

(2) November 1, 2014.

(3) December 31, 2014.

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 of $150,000

3. Interest revenue earned in 2014 $49,000

Instructions

(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.

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2014.

Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan—12% interest, payable semiannually, issued

December 31, 2013 $2,000,000Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,400,000Long-term loan—11% interest, payable on January 1 of each year. Principal payable on January 1, 2018 1,000,000

Instructions

(Carry all computations to two decimal places.)

(a) Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.

(b) Compute the depreciation expense for the year ended December 31, 2015. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.

Plant acquisitions for selected companies are as follows.

1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co.,for a lump-sum price of $700,000. At the time of purchase, Torres’s assets had the following book and appraisal values.

Book Values Appraisal Values

Land $200,000 $150,000

Buildings 250,000 350,000

Equipment 300,000 300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired.

The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

2. Harry Enterprises purchased store equipment by making a $2,000 cash down payment and signing

a 1-year, $23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

3. Kim Company purchased office equipment for $20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $27,000. The company made no entry to record the land because it had no cost basis.

5. Zimmerman Company built a warehouse for $600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings 740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company’s fee for title search $ 520

Architect’s fees 3,170

Cash paid for land and dilapidated building thereon 87,000

Removal of old building $20,000

Less: Salvage 5,500 14,500

Interest on short-term loans during construction 7,400

Excavation before construction for basement 19,000

Machinery purchased (subject to 2% cash discount, which was not taken) 55,000

Freight on machinery purchased 1,340

Storage charges on machinery, necessitated by noncompletion of building when machinery was delivered 2,180 New building constructed (building construction took 6 months from date of purchase of land and old building) 485,000

Assessment by city for drainage project 1,600

Hauling charges for delivery of machinery from storage to new building 620

Installation of machinery 2,000

Trees, shrubs, and other landscaping after completion of building (permanent in nature) 5,400

Instructions

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment.

Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicatehow any costs not debited to these accounts should be recorded.

Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2014.3

Purchase

Cash paid for equipment, including sales tax of $5,000 $105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during fi rst year of operation on this equipment 1,500

Special plumbing fi xtures required for new equipment 8,000

Repair cost incurred in fi rst year of operations related to this equipment 1,300

Construction

Material and purchased parts (gross cost $200,000; failed to take 2% cash discount) $200,000

Imputed interest on funds used during construction (stock fi nancing) 14,000

Labor costs 190,000

Allocated overhead costs (fi xed—$20,000; variable—$30,000) 50,000

Profi t on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2014. The terms of acquisition for each truck are described below.

1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.

2. Truck #2 has a list price of $16,000 and is acquired for a down payment of $2,000 cash and a zerointerest- bearing note with a face amount of $14,000. The note is due April 1, 2015. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.

3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for $15,200.

Clarkson uses a perpetual inventory system.

4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in

Clarkson Corporation. The stock has a par value per share of $10 and a market price of $13 per share.

Instructions

Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.