EXERCISE 10-7 (20–25 minutes)

(a)

Avoidable Interest

Weighted-Average

Accumulated Expenditures

X

Interest Rate

=

Avoidable Interest

$2,000,000

12%

$240,000

1,600,000

10.42%

166,720

$3,600,000

$406,720

Weighted-average interest rate computation

Principal

Interest

10% short-term loan

$1,400,000

$140,000

11% long-term loan

1,000,000

110,000

$2,400,000

$250,000

Total Interest

=

$250,000

= 10.42%

Total Principal

$2,400,000

(b)

Actual Interest

Construction loan

$2,000,000 X 12% =

$240,000

Short-term loan

$1,400,000 X 10% =

140,000

Long-term loan

$1,000,000 X 11% =

110,000

Total

$490,000

Because avoidable interest is lower than actual interest, use

avoidable interest.

Cost

$5,200,000

Interest capitalized

406,720

Total cost

$5,606,720

Depreciation Expense

=

$5,606,720 – $300,000

= $176,891

30 years

10-4

Copyright © 2016 John Wiley & Sons, Inc.

Kieso,

Intermediate Accounting,

16/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 10-17 (10–15 minutes)

Busytown Corporation

Machinery ($340 + $85)

.....................................................

425

Accumulated Depreciation – Machinery

.........................

140

Loss on Disposal of Machinery

.......................................

65*

Machinery

.................................................................

290

Cash

..........................................................................

340

*Computation of loss:

Book value of old machine ($290 – $140)

$150

Less: Fair value of old machine

85

Loss on disposal of machinery

$

65

Dick Tracy Business Machine Company

Cash

...................................................................................

340

Inventory

............................................................................

85

Cost of Goods Sold

..........................................................

270

Sales Revenue

.........................................................

425

Inventory

..................................................................

270

LO: 4, Bloom: AP, Difficulty: Simple, Time: 10-15, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc.

Kieso,

Intermediate Accounting,

16/e, Solutions Manual

(For Instructor Use Only)

10-5

EXERCISE 10-18 (20–25 minutes)

(a)

Exchange has commercial substance

:

Depreciation Expense

......................................................

700

Accumulated Depreciation—Equipment

...............

700

($11,200 – $700 = $10,500;

$10,500 ÷ 5 = $2,100;

$2,100 X 4/12 = $700)

Equipment

.........................................................................

15,200**

Accumulated Depreciation—Equipment

........................

7,000

Gain on Disposal of Equipment

.............................

1,000*

Equipment

................................................................

11,200

Cash

..........................................................................

10,000

*Cost of old asset

$11,200

Less: Accumulated depreciation

($6,300 + $700)

7,000

Book value of equipment (old)

4,200

Less: Fair value of old asset

(5,200

)

Gain on disposal of equipment

$

1,000

**Cash paid

$10,000

Fair value of old asset

5,200

Cost of new asset

$15,200

10-6

Copyright © 2016 John Wiley & Sons, Inc.

Kieso,

Intermediate Accounting,

16/e, Solutions Manual

(For Instructor Use Only)