Fuel and Oil Truck Expense Record

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					                                                           CHAPTER 9



                              PROPERTY, PLANT, AND EQUIPMENT: ACQUISITION AND DISPOSAL




CONTENT ANALYSIS OF EXERCISES AND PROBLEMS



                                                                        Time Range
Number                                                     Content         (minutes)

E9-1           Determination of Cost. Analysis of numerous items                         5-10
               to determine whether or not to include in property,
               plant, and equipment.

E9-2           Property, Plant, and Equipment. Analysis of various                       5-10
               items for potential balance sheet inclusion.

E9-3Acquisition Costs. Compute total acquisition costs      5-10
               of machine and prepare journal entry to record.

E9-4           Acquisition Cost. Journal entry to record acquisition.                    5-15
               Analysis of entry if price not available.

E9-5           (AICPA adapted). Acquisition Cost. Determination                          5-15
               of cost and journal entry to record acquisition.

E9-6           (AICPA adapted). Acquisition of Land and Building.                        10-15
               Computation of land and new building cost.

E9-7           Lump Sum Purchase. Cost assigned to land, buildings,                      10-15
               and equipment.

E9-8           Exchange of Assets. No boot, similar productive                           10-15
               assets. Journal entries.

E9-9           Exchange of Assets. Boot, similar productive assets,                      10-15
               loss. Journal entries.

E9-10          Exchange of Assets. Boot, similar productive assets,                      10-15
               gain. Journal entries.

E9-11          Exchange of Assets. No boot, dissimilar productive                        10-15
               assets. Journal entries.

E9-12          Exchange of Assets. Boot, dissimilar productive                           10-15
               assets. Journal entries.

E9-13          (AICPA adapted). Exchange of Assets. No boot,                             5-10
               similar productive assets. Determination of




                                                                 9-1
         amount to be shown in the accounting records.
                                                                   Time Range
Number                                                 Content        (minutes)

E9-14    Self-Construction. Determination of amount to be                         10-15
         capitalized. Evaluation under differing outside
         contractor's bids.

E9-15    Donation. Journal entry to record acquisition.                           10-20
         Financial statement disclosure. Time differences
         for passage of title.

E9-16    Interest During Construction. Compilation of amount                      5-15
         to be capitalized. Financial statement disclosure.

E9-17    Interest During Construction. Compute amount of                          5-15
         capitalized interest and interest revenue.

E9-18    Expenditures. Capital vs. operating. Classification                      5-10
         of various items.

E9-19    (Appendix). Oil and Gas Accounting. Successful                           10-20
         efforts, full-cost methods. Determination of
         expense and balance sheet value.

P9-1     Acquisition Costs. Reclassification of erroneously                       20-30
         recorded items. Journal entries.

P9-2     Costs Subsequent to Acquisition. Adjusting entries                       45-60
         to correct the books from improperly recorded costs.
         Acquisition, legal fees, insurance, additions, repairs.

P9-3     Cost Classification. Journal entries to record                           25-35
         various transactions. Acquisition, parking lot,
         sale, lease, freight, installation, taxes.

P9-4     (CMA adapted). Self-Construction. Computation                            30-45
         according to GAAP of amount to be capitalized.
         Identification of any alternative procedures.

P9-5     Acquisition Cost. Acquisition, replacement, 20-30
         purchase. Journal entries to record various
         transactions.

P9-6     (AICPA adapted). Comprehensive: Analysis of                              25-35
         Changes in Fixed Assets. Preparation of schedules
         for changes in land, building, leasehold improvements,
         and machinery and equipment.

P9-7     Assets Acquired by Exchange. Various situations                          40-60
         dealing with similar or dissimilar productive
         assets and boot. Journal entries.




                                                           9-2
                                                                              Time Range
Number                                                      Content              (minutes)

P9-8           Assets Acquired by Exchange. Various situations                                                         30-45
               dealing with similar or dissimilar productive assets,
               boot, and changing fair value. Journal entries.

P9-9           Interest During Construction. Computation of amount                                                     20-30
               to be capitalized and amount to be depreciated.
               Straight-line. Effects on financial statements.

P9-10          Comprehensive: Interest Capitalization. Computation                                                     40-60
               of amounts of capitalized interest, interest expense,
               and interest revenue. Journal entries to record
               construction costs, including interest.

P9-11          Events Subsequent to Acquisition. Replacement,                                                          20-30
               repairs, demolition. Journal entries to record
               various transactions.

P9-12          (AICPA adapted). Comprehensive: Adjusting Entries.                                                      40-60
               Analysis of machinery and equipment account. Schedules
               to show effect of additions and retirements on
               account balances. Journal entries.

P9-13          (AICPA adapted). Adjusting Entries. Analysis of                                                         40-60
               the building account. Journal entries to adjust
               the account as necessary. Supporting computations.

P9-14(Appendix). Oil and Gas Accounting. Successful        10-20
              efforts, full-cost methods. Financial statement
              disclosure.




ANSWERS TO QUESTIONS


Q9-1For a company to include an asset in the category of property, plant, and equipment, the asset must: (1) be held for use in the
              normal course of business; (2) have an expected useful life of more than one year; and (3) be tangible property - that
              is, the asset must have physical substance.

Q9-2Generally, a company capitalizes the expenditures that are necessary to obtain the benefits to be derived from the asset and
               includes them as a cost of property, plant, and equipment. The expenditures include the costs incurred in the
               acquisition of an asset and in putting the asset into operating condition. The company expenses the costs of
               maintaining the benefits at the levels originally expected.

Q9-3A company classifies land held for investment on the balance sheet as an investment. It does not include the land as property,
            plant, and equipment, since it is not being used in the normal course of business in a productive capacity.




                                                                 9-3
Q9-4The book value of an asset is the recorded acquisition cost less the accumulated depreciation recorded to date.

Q9-5At the date of acquisition, the acquisition cost is equal to the market value. At the end of the life of the asset, the book value
               should equal the residual value (a market value). During the life of the asset, there is no defined relationship between
               the book value and market value because depreciation is a process of cost allocation, not of market valuation.

Q9-6In a lump-sum purchase, the company allocates the total purchase price to the individual assets on the basis of their relative fair
               values. This allocation is necessary because some of the assets may have different economic lives, may not be
               depreciable, or may be depreciated by different methods.

Q9-7When a company exchanges securities for an asset, the acquisition cost of that asset is either the fair value of the securities
             given up or the fair value of the asset acquired. The company makes the choice on the basis of the market that is
             more reliable. If neither of these amounts is known, it may use an appraisal of the asset, or, as a final solution, the
             company's board of directors may place a value on the transaction.

Q9-8The distinction between similar and dissimilar productive assets is that similar productive assets are of the same general type
               and perform the same basic function and are used in the same line of business. This distinction is made because, in
               the exchange of similar productive assets, the earning process is not considered completed, and thus the accounting
               for the transaction is different than when dissimilar productive assets are exchanged.

Q9-9When similar productive assets are exchanged, the company recognizes a gain to the extent that it receives "boot" along with
             the asset. The company recognizes a loss in accordance with the conservatism principle of accounting.

When dissimilar productive assets are exchanged, the earning process is considered completed and the company recognizes both
              gains and losses.

Q9-10The term "boot" refers to monetary consideration either paid or received. For the special rules to apply, the boot must be less
              than 25% of the fair value of the transaction.

Q9-11The general principle underlying accounting for dissimilar productive assets is that the earning process has been completed
             and thus gains or losses are recognized. On the other hand, in accounting for similar productive assets the earning
             process has not been completed. The company is in the same relative position, so gains on the exchange is deferred
             (except to the extent that boot is received). Losses are recognized in accordance with the conservatism principle.

Q9-12According to the provisions of FASB Statement No. 34, a company capitalizes interest on the acquisition of an asset if the asset
             requires a period of time to get it ready for its intended use - a criterion that is met for the self-construction of an asset.
              Specifically, the company does not capitalize interest for the following types of assets:
                1.Inventories that are routinely manufactured or otherwise produced on a repetitive basis.

                2.Assets that are in use or ready for their intended use.
                3.Assets that are not being used in the earning activities of the company and are not undergoing the activities
                      necessary to get them ready for use.

Since imputed interest is not capitalized, the company must have borrowed funds to finance the self-construction of the asset.

In contrast, interest on a note payable (that is not associated with the construction of an asset) is expensed as incurred.

Q9-13A company bases the amount of interest capitalized for a self-constructed asset on the actual amounts borrowed and the cost
             of those borrowings. The amount is intended to be that portion of the interest cost incurred during the asset's
             construction period that theoretically could have been avoided. The company determines the amount that it
             capitalizes by applying an interest rate to the average amount of the expenditures on the self-constructed asset
             during the capitalization period.




                                                                    9-4
Q9-14Since activities that are necessary to get the asset ready for its intended use are in progress, the asset qualifies for interest
               capitalization. The company capitalizes interest to the building account unless it makes specific expenditures that
               are normally added to the land account, as discussed at the beginning of this chapter.

Q9-15Three alternative treatments of fixed overhead costs are (1) to allocate a portion of the total fixed overhead to the cost of the
               asset being constructed, (2) to include only the incremental fixed overhead that is attributable to construction in the
               cost of the self-constructed asset, or (3) to include no fixed overhead in the cost of the self-constructed asset.
               Proponents of the allocation of total overhead argue that construction should be treated the same as any other
               production process that receives a portion of overhead costs. This method is appropriate when the company is
               operating at full capacity and regular production is reduced by the self-construction. Arguments in favor of including
               only the incremental increase are that normal production costs should include the same amount of overhead whether
               construction is going on or not, the normal overhead would be incurred anyway, and that the cost of an asset and the
               decision to construct it should be based on additional and incremental costs incurred. This method is appropriate
               when the company is in an excess capacity situation. The argument in favor of including no fixed overhead is that the
               fixed overhead does not change as a result of the construction. Therefore, to include some overhead would result in
               less overhead being expensed in the current period, and an increase in income.
Q9-16Under generally accepted accounting principles, a company may not recognize profit on the self-construction of an asset. The
               revenue recognition principle allows recognition of profit on asset use and disposal, not on the acquisition or
               construction of an asset. If construction costs are materially greater than the fair value of the asset, then the
               convention of conservatism requires the company to write-down the capitalized costs and recognize a loss.

Q9-17The distinction between a capital expenditure and an operating expenditure is whether the costs have increased the future
               economic benefits of the asset above those that were originally expected. The future economic benefits can be
               increased by extending the life of the asset, improving productivity, producing the same product at a lower cost, or
               increasing the quality of the product. For example, if a machine receives a major overhaul that increases the benefits
               to be realized from the asset, the costs are capitalized. Conversely, ordinary repairs are of a maintenance type that
               do not increase the total benefits to be realized, and, therefore, are expensed. As another example, the cost of adding
               a new wing to an existing hospital is capitalized since it increases the total benefits of the hospital, whereas repairing
               the elevators does not increase the economic benefit of the hospital and so is expensed.

Q9-18An addition is a new asset that is being "added" or utilized in conjunction with an old asset. In contrast, an improvement/
              replacement involves the substitution of a new part or asset for an old one. In accounting for an addition, a company
              capitalizes the costs of the addition, and takes out of the old asset account any portion of the old asset that is
              demolished or removed. A company capitalizes improvement and replacement costs using the substitution method
              when it knows the book value of the asset being replaced, by replacing the old book value with the cost of the new
              asset. If it does not know the old book value, then it still capitalizes the cost of the new asset, but with either a debit
              to the Accumulated Depreciation account of the old asset or a debit to the old Asset account.

Q9-19The costs of ordinary repairs and maintenance are expenses incurred routinely to keep the asset in operating condition. Since
              these costs do not increase the future benefits of the asset, a company expenses them as they are incurred. For
              interim financial reporting, the use of an Allowance account is appropriate in order to even out the expenses.
              However, this account is closed at the end of the year. Extraordinary repairs are those that cannot be foreseen and
              do not occur in the usual course of operations, such as emergency repairs to a machine that breaks down during
              production. Usually, a company expenses these costs, but care should be taken to note whether these repairs
              increase the future benefits of the asset. If they do, then the company capitalizes the costs.

Q9-20Leasehold improvements are improvements made to leased property that, upon termination of the lease, will revert back to the
             lessor. A company capitalizes the cost of these improvements and subsequently amortizes them over the economic
             life of the improvements or the lease term, whichever is shorter.

Q9-21An Allowance for Repairs account appears only on balance sheets of interim financial statements if a company incurs repair
             costs unevenly. At year-end, this account is closed; thus, it does not appear on a year-end balance sheet.

Q9-22A company accounts for the disposal of an asset by removing both the asset and accumulated depreciation to date from the
             ledger, recording the receipt of cash, if any, and also recording any gain or loss. It reports this gain or loss in ordinary
             income (in the category of Other Items) on the income statement unless it meets the criteria for an extraordinary item.


                                                                  9-5
Q9-23Under the successful-efforts method of accounting for oil and gas properties, a company capitalizes only those costs incurred
              in drilling for successful wells while it expenses the costs of unsuccessful wells. In contrast, under the full-costing
              method a company capitalizes all costs of drilling wells, whether the drilling was successful or not.




ANSWERS TO CASES



C9-1 (AICPA adapted solution)

1.The expenditures that are capitalized when equipment is acquired for cash include the invoice price of the equipment (net of
       discounts) plus all incidental outlays relating to its purchase or preparation for use, such as insurance during transit, freight,
       duties, ownership search, ownership registration, installation, and breaking-in costs. Any available discounts, whether taken
       or not, should be deducted from the capitalizable cost of the equipment.

2.a.When the market value of the equipment is not determinable by reference to a similar cash purchase, the capitalizable cost of
            equipment purchased with bonds having an established market price is the market value of the bonds.

       b.When the market value of the equipment is not determinable by reference to a similar cash purchase, and the common stock
            used in the exchange does not have an established market price, the capitalizable cost of equipment is the equipment's
            estimated fair value if that is more clearly evident that the fair value of the common stock. Independent appraisals may
            be used to determine the fair values of the assets involved.

       c.When the market value of equipment acquired is not determinable by reference to a similar cash purchase, the capitalizable
            cost of equipment purchased by exchanging similar equipment having a determinable market value is the lower of the
            recorded amount of the equipment relinquished or the market value of the equipment exchanged.

C9-1 (continued)

3.The factors that determine whether expenditures relating to property, plant, and equipment already in use are capitalized are as
       follows:

       •Expenditures are relatively large in amount.

       •They are nonrecurring in nature.

       •They extend the useful life of the property, plant, and equipment.

       •They increase the usefulness of the property, plant, and equipment.

4.The net book value at the date of the sale (cost of the property, plant, and equipment less the accumulated depreciation) is removed
       from the accounts. The excess of cash from the sale over the net book value removed is accounted for as a gain on the sale,
       while the excess of net book value removed over cash from the sale is accounted for as a loss on the sale.

C9-2 (AICPA adapted solution)

1.Expenditures are capitalized when they benefit future periods. The cost to acquire the land is capitalized and classified as land, a
      nondepreciable asset. Since tearing down the small factory is readying the land for its intended use, its cost is part of the cost
      of the land and is capitalized and classified as land. As a result, this cost is not depreciated as it would be if it was classified
      with the capitalizable cost of the building.

Since the rock blasting and removal is required for the specific purpose of erecting the building, its cost is part of the cost of the
       building and is capitalized and classified with the capitalizable cost of the building. This cost is depreciated over the
       estimated useful life of the building.


                                                                   9-6
The road is a land improvement, and its cost is capitalized and classified separately as a land improvement. This cost is depreciated
      over its estimated useful life.

The added four stories is an addition, and its cost is capitalized and classified with the capitalizable cost of the building. This cost is
      depreciated over the remaining life of the original office building because that life is shorter than the estimated useful life of
      the addition.

2.The gain is recognized on the sale of the land and building because income is realized whenever the earning process is complete
       and the sale takes place.

The book value at the date of the sale is composed of the capitalized cost of the land, the land improvement, and the building, as
      determined above, less the accumulated depreciation on the land improvement and the building. The excess of the proceeds
      received from the sale over the net book value at the date of sale is accounted for as part of income from continuing operations
      in the income statement.
C9-3 (AICPA adapted solution)

1.The capitalizable cost includes all costs relating to purchase or preparation for use. Such cost may include delivery and installation.
       The capitalizable cost represents the cash equivalent price and accordingly would not include interest charges.

2.Normal maintenance performed on the new machine should not be capitalized as part of the machine's cost. It should be expensed
      as incurred if the machine is not used in the manufacturing process or should be inventoried as part of factory overhead if the
      machine is used in the manufacturing process. Normal maintenance does not enhance the service potential of the machine.

3.The wing added to the manufacturing building should be capitalized. The addition should be depreciated over its estimated useful
      life or the remaining useful life of the building of which it is an integral part, whichever is shorter. The addition should be
      included in the property, plant, and equipment section of the balance sheet.

4.The leasehold improvements made to the office space should be capitalized. The leasehold improvements should be depreciated
       (amortized) over their estimated useful lives or the term of the lease, whichever is shorter. The unamortized portion of the
       leasehold improvements could be included as a separate caption in the property, plant, and equipment section or the
       intangible assets section of the balance sheet. The amortized portion of the leasehold improvements would be shown as an
       expense in the income statement.

C9-4 (AICPA adapted solution)

1.The following costs, if applicable, should be capitalized as a cost of land:


       (a)Negotiated purchase price

       (b)Brokers' commission

       (c)Legal fees

       (d)Title fee

       (e)Recording fee

       (f)Escrow fees

       (g)Surveying fees

       (h)Existing unpaid taxes, interest, or liens assumed by the buyer

       (i)Clearing, grading, landscaping, and subdividing

       (j)Cost of removing old building (less salvage)
       (k)Special assessments such as lighting or sewers if they are permanent
in nature.



                                                                   9-7
C9-4 (continued)

2.A plant asset acquired on a deferred-payment plan should be recorded at an equivalent cash price excluding interest. If interest is
       not stated in the sales contract, an imputed interest should be determined. The asset should then be recorded at its present
       value, which is computed by discounting the payments at the stated or imputed interest rate. The interest portion (stated or
       imputed) of the contract price should be charged to interest expense over the life of the contract.

3.In general, plant assets should be recorded at the fair value of the consideration given or the fair value of the asset received,
       whichever is more clearly evident. This general theoretical preference is somewhat constrained by the requirements of APB
       Opinion No. 29.

Specifically when exchanging an old machine and paying cash for a new machine, the new machine should be recorded at the
       amount of monetary consideration (cash) paid plus the undepreciated cost of the nonmonetary asset (old machine)
       surrendered if there is no indicated loss. An indicated loss should be recognized; this would reduce the recorded amount of
       the new machine. No indicated gain, however, should be recognized by the party paying monetary consideration.

C9-5 (AICPA adapted solution)

1.Capital expenditures benefit future periods. Revenue (operating) expenditures benefit the current period only.

2.a.The purchase price of the land should be capitalized. The land should be shown as a noncurrent asset on the balance sheet at its
            original cost and it is not subject to depreciation.

       b.The cost of constructing the factory should be capitalized and depreciated over the expected life of the factory. The
             depreciation should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as
             cost of sales as goods are sold. The factory expenditures, net of accumulated depreciation, should be shown as a
             noncurrent asset on the balance sheet. Inventory should be reported as a current asset on the balance sheet, and cost
             of sales should be reported as an expense on the income statement.

       c.The cost of grading and paving the parking lot should be capitalized and depreciated over the expected life of either the
             factory or parking lot, whichever is shorter. The depreciation should be added to cost of inventory, via factory overhead,
             as goods are produced, and is expensed as cost of sales as goods are sold. The land improvement expenditures, net
             of accumulated depreciation, should be shown as a noncurrent asset on the balance sheet. Inventory should be
             reported as a current asset on the balance sheet, and cost of sales should be reported as an expense on the income
             statement.

C9-5 (continued)
2. (continued)

       d.The cost of maintaining the factory once production has begun is a "revenue type" expenditure. However, since it is a
             factory cost, it should be added to cost of inventory, via factory overhead, as goods are produced, and is expensed as
             cost of sales as goods are sold. Inventory should be reported as a current asset on the balance sheet, and cost of sales
             should be reported as an expense on the income statement.

C9-6

1.a.It is clear that considerable value attaches to the television rights. A conservative approach to the valuation is to compute the
               present value of the cash flows expected under the currently existing television contract. However, since it can be
               expected that a new television contract will be signed to replace the existing contract, probably at different rates, it could
               be argued that a longer time period should be considered. Certainly a buyer would be including a longer time period in
               the estimation of the future cash flows expected if the franchise is purchased.

       b.The value assigned to the television rights is considered depreciable because the service provided by the franchise (that is,
             playing the games) is partially used up each season. The depreciation is over the period used in determining the value




                                                                    9-8
             of the television rights. The argument against depreciating the value of the television rights would be that the televising
             of football games can be expected to continue indefinitely in the future, and, therefore, the value does not decline.

       c.The purchase price assignable to player contracts is the present value of the benefits generated by the player less the
             salaries payable under current contracts. This is a subjective valuation that would be very difficult to determine in
             practice.

       d.The value assigned to the player contracts is depreciated over the estimated playing career or the contract period,
             whichever is shorter.

       e.The value of the franchise is the present value of the future cash flows, after tax, generated by the franchise. Thus, it
             includes the expected cash inflow from television rights, ticket sales, etc., less the expected cash outflow for players'
             contracts, franchise operations, etc. Presumably, this is believed by the buyer to be greater than $8.5 million.

C9-6 (continued)

2.Students may raise ethical issues, such as:

       a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

       b.The allocation of cost to each depreciable asset and the selection of the estimated useful life, and the effects of those
             choices on net income.

       c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
             compute taxable income.

C9-7

1.There is no doubt that the first 2,000 acres qualifies for interest capitalization because it meets the various criteria of FASB
      Statement No. 34. It meets the criteria of a qualifying asset and the three criteria for the start of the capitalization period -
      expenditures have been made, activities are in progress, and interest cost is being incurred.

The remaining 3,000 acres of the initial 5,000 acres also qualify for interest capitalization. FASB Statement No. 34 specifies that the
      term "activities" is to be construed broadly and should include more than physical construction. Since the 5,000 acres were
      acquired for a single development, "activities" are in progress on the entire 5,000 acres.

It is less definite whether the adjacent parcel of land qualifies for interest capitalization. The decision will probably be determined by
         how the company has developed its plans. If the plans indicate that the entire project is a single integrated development on
         which design work has been performed and permits obtained, then the adjacent parcel of land would also qualify for interest
         capitalization. On the other hand, if the company's plans indicate that the additional acreage was acquired for speculative
         reasons and the design work and permits do not include this additional acreage, then the adjacent parcel of land does not
         qualify for interest capitalization.

The development also qualifies for interest capitalization because it meets the criteria of FASB Statement No. 34.

2.The company could commence activities on all the land, by starting such activities as planning the future expansion. Since FASB
       Statement No. 34 states that the term activities is to be construed broadly, such actions would allow the company to compute
       the interest capitalized on the amounts borrowed to acquire all the land. This would increase the interest capitalized and the
       asset value, thereby reducing interest expense and increasing net income.




                                                                    9-9
C9-8

Capitalize at $100,000: The option costs are not applicable to the purchase price and are, therefore, not a cost of the land. Rather,
       they are an expense incurred during the year required to make a decision and should not be capitalized. The option was for
       a period of one year and thus its usefulness has expired and should not be capitalized.

Capitalize at $105,000: Because the option cost of $5,000 was necessary in order to purchase the desired site, this amount should be
       capitalized along with the contract price of $100,000. The option for the site not chosen has no usefulness once the other site
       was purchased and should be expensed.

Capitalize at $110,000: In order for the company to make the best choice as to sites, it was necessary to acquire both options.
       Therefore, regardless of which site was chosen, the total cost of both options should be capitalized along with the contract
       price.

C9-9

According to APB Opinion No. 29, donated assets are recorded at their fair value. The controller's argument of no payment by the
      company is what makes the acquisition a nonreciprocal transfer and thus governed by APB No. 29. This procedure also
      makes the recording of the asset consistent with the treatment of other assets that are recorded at their fair value at the date
      of acquisition.

The alteration costs of $15,000 are necessary in order for the company to put the building into operating condition. These are
       considered a cost of the building and are capitalized. The possibility of the building being returned to the city is not relevant
       to the capitalization of these costs, unless the return is considered probable under the terms of FASB Statement No. 5. The
       argument that exclusion of the $15,000 will closer approximate the market value of the building is invalid. There is no
       relationship between an asset's recorded value and its fair value, except by coincidence. The issue of reducing income taxes
       is also not relevant to financial reporting.

C9-10 (AICPA adapted solution)

1.The valuation of assets that are acquired by a corporation in exchange for its own common stock is sometimes difficult because of:

       a.The absence of a readily determinable fair value for the assets acquired because they are not traded actively.

       b.The absence of a readily determinable fair value for the securities given in exchange, either because they are not traded
             actively or because the proportion of the number of shares in this single issue to all shares being traded is large enough
             to affect the market price substantially.

       c.The absence of arm's length or independent bargaining leading to the exchange.
C9-10 (continued)
1. (continued)

       d.Widely varying estimates of the value of the asset acquired because of its nature (for example, unexplored or unproved
            mineral deposits, manufacturing rights and patents).

       e.The common presumption that when capital stock has a par or stated value it imputes a value to the assets for which it is
             exchanged.

2.a.The directors of Brahe Corporation appraised the leases at $600,000 and the transaction involving the stock issuance to Messrs.
             Moses and Price supports that appraisal. In the exchange transaction, a price of $6 per share was imputed to the Brahe
             Corporation common stock when 75,000 shares were given to Messrs. Moses and Price ($6 x 75,000 = $450,000) in
             exchange for assets worth $200,000 and options which, based on the appraisal of the directors, were worth $250,000.
             This transaction was followed by a public sale of 180,000 shares of Brahe Corporation common stock at $6 per share,
             the same price that was imputed to the stock earlier when Messrs. Moses and Price obtained 75,000 shares in
             connection with the exchange. The fact that the public was willing to purchase, and did purchase, substantial shares at


                                                                 9-10
             the same price would indicate that the appraisal value of leases recorded on the books is a reasonable one.
             Furthermore, the law allows boards of directors broad discretion in establishing values, provided there is no fraud.

        b.Brahe Corporation might have taken additional steps to demonstrate the reasonableness of the $600,000 appraisal of leases
             so that more information would be available if questions were raised about their possible overvaluation. Because the
             appraisal was based solely upon the lease price of certain other acreage in the area, it would have been wise to obtain
             supplementary appraisals by independent competent technicians to support the value. This is particularly true because
             the board was not independent, having been elected by Messrs. Moses and Price, who were the sole stockholders, and
             also the parties who were offering the options to Brahe Corporation. In addition, Brahe Corporation could have
             compiled data to substantiate beyond doubt the reasons why an acceptable bargain purchase did exist here in
             permitting the purchase with options for only $350,000 of leases worth the substantially higher amount of $600,000.

3.Based on available information, Brahe Corporation should charge 1/10 of the value of the leases against income at December 31,
      2001, in accordance with generally accepted accounting principles. However, this should not be done if (a) the total lease
      acreage can be regarded as a unitary whole, or (b) the investment was made with anticipation that some portion of the total
      acreage obtained would prove worthless.

C9-11

Note to Instructor: This case does not have a definitive answer. From a financial reporting perspective, GAAP is identified and
       summarized. From an ethical perspective, various issues are raised for discussion purposes.

From a financial reporting perspective, there are 3 issues. The first issue relates to when interest capitalization begins. Under GAAP,
      it begins when (1) expenditures for the asset have been made, (2) activities that are necessary to get the asset ready for its
      intended use are in progress, and (3) interest cost is being incurred. Assuming that the company has debt and that the
      architect has been paid (often a retainer is paid), then the three conditions probably were met in 1999. A second issue is the
      costs that can be included. The expenditures on which interest is capitalized are the cumulative capitalized expenditures on
      the project. This would allow including 1/12 of the accountant's salary and similar expenditures, although it would be
      necessary to have documentation that such costs were directly related to the project. The third issue is how to report the
      interest cost if there was no capitalization in 1999. If interest was not capitalized, then this is an error because there was a
      misapplication of accounting principles. The error would be accounted for as a prior period adjustment. So the CEO has to
      accept the "good" of maximizing the interest capitalization in 2000 and the "bad" of admitting to an error in applying
      accounting principles (even though income in 1999 will be increased by the error correction). Of course, the suggestion of
      including 1999's interest capitalization in 2000 is not appropriate.

From an ethical perspective, the issue is whether it is appropriate to "dump" costs into the project so that the costs are maximized,
      interest capitalized is maximized, interest expense and other expenses are minimized, and net income is maximized. The
      primary stakeholders are the company's current and potential stockholders and creditors. Accounting principles allow for
      judgment on these issues and expect that professional judgment be exercised. On the other hand, if the net income amount
      is not grounded in economic reality, current and potential stockholders may be misled about the value of an investment in the
      company. Also, the CEO should be reminded that the higher cost of the building will result in higher depreciation expense,
      although that long-term perspective may be of no concern.




                                                                 9-11
C9-12

Note to Instructor: Students are expected to cite paragraphs from the FASB Original Pronouncements in their research of this issue.
 Since the Statements of Concepts are not included in the FASB Current Text, reference is made to Intermediate Accounting. Also,
the issues in this case are addressed by the FASB Emerging Issues Task Force Issue No. 89-13 which is included in a separate
published volume.

1.      To:President, Tenth National Bank

        From:Student

I have researched the issue of how to account for the costs of removing the asbestos from the two buildings. According to the FASB
       Original Pronouncements, Concepts Statement No. 6, par. 25 and 26 (Intermediate Accounting, p. 58) assets are probable
       future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Also, an asset
       involves a capacity to contribute directly or indirectly to future cash flows.

First, I will deal with the office building that was purchased with a known asbestos problem. The $2 million cost of removing the
         asbestos may be considered to be a cost that was necessary to prepare the building for its intended use. It may also be
         argued that the cost of $2 million indirectly contributes to the future cash inflows because without the cost the building could
         not be used. Both these arguments assume that the selling price was reduced because of the known estimated costs of
         removing the asbestos. Based on these issues, I recommend that the $2 million be capitalized to the cost of the building.

Note that a counter argument is that the $2 million is a "maintenance" cost that does not extend the useful life or improve the physical
       structure beyond the state in which it was originally intended to be used. Under this argument, the cost would be expensed.

The second issue is the shopping mall in which the asbestos problem was not known at the time the building was acquired. The
      following alternatives may be considered:

        a.Expense the $1 million because it is a "maintenance" cost that does not extend the useful life or improve the property
             beyond its original state. Instead the cost returns the building to its normal state of repair. Also, it may be argued that
             the "extra" cost does not benefit future periods.

        b.Capitalize the $1 million for the reasons outlined earlier for the office building. Also, it may be argued that incurring the
             costs has extended the life of the mall because without the costs the life would be very short. However, these arguments
             assume that the mall can be sold at a profit; that is, the $1 million can be recovered through a sale. If a loss is expected,
             the cost must be expensed.

       c.Capitalize the portion of the $1 million that relates to "normal" replacement of the affected portions of the building and
            expense any "special" costs incurred because of the asbestos problem.
C9-12 (continued)
1. (continued)

I recommend that the $1 million be expensed (unless it can be demonstrated that the amount will be recovered through a sale which
       seems unlikely since the building was obtained through a foreclosure).

Another issue is how to classify the expense. Three alternatives are:



        a.Report as an extraordinary item because it is considered to be unusual and infrequent (FASB Current Text, par. I17.401 or
             FASB Original Pronouncements, APB 30, par. 20). This alternative is difficult to justify because of the numerous
             asbestos problems affecting large numbers of buildings.

        b.Report as an unusual or infrequent item that is disclosed as a separate line item in the income statement. This alternative is
             easier to justify because asbestos problems have occurred infrequently for this bank.




                                                                   9-12
        c.Report as an operating expense with no special disclosure in the income statement.

I recommend that the $1 million be classified as an operating expense with no special disclosure in the income statement because
       asbestos problems have become so widespread and banks frequently repossess buildings, thereby making the cost neither
       unusual nor infrequent. However, disclosure in the notes to the financial statements may be appropriate.

Note that this recommendation does not consider the value at which the repossessed shopping mall is carried. AICPA Statement of
       Position No. 92-3 states that foreclosed assets held for sale are carried at the lower of the cost or fair value, less estimated
       costs to sell.

2.Students may raise ethical issues, such as:

        a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

        b.The disclosure responsibilities of sellers.

        c.The liability exposure of professionals who provide estimates of future costs.

C9-13

Note to Instructor: Students are expected to cite paragraphs from the FASB Current Text or FASB Original Pronouncements in their
research of this issue.

1.      To:President, Perry Park Company

        From:Student

I have researched the various issues involved in the exchange of the shares for the land and building. I will address each of the major
        issues you raised:

        a.Does the transaction qualify as a nonmonetary exchange? Since no cash was exchanged, it is a nonmonetary exchange.
             However, according to the FASB Current Text, par. N35.407 (FASB Original Pronouncements, APB 29, par. 3e), similar
             productive assets are of the same general type, that perform the same function, or that are employed in the same line of
             business. Clearly the exchange of shares for land and a building does not meet this criterion. Therefore, the exchange
             is of dissimilar productive assets and the transaction must be recorded at fair value.

        b.What is the value to place on the transaction and its components? According to the FASB Current Text, par. N35.105 (FASB
             Original Pronouncements, APB 29, par. 18), either the value of the shares or the value of the land and building may be
             used, but the most reliable value should be used. If both values are equally unreliable, it is preferable to use the value
             of the assets because it is independent of the value of the shares. A final alternative is to have the Board of Directors
             place a value on the transaction.

2.Students may raise ethical issues, such as:

        a.Conflicts between the interests of different stakeholders--particularly management, stockholders, and the government.

        b.The value assigned by each entity will affect net income, and perhaps management compensation such as bonuses.

        c.The allocation of a tax basis to each depreciable asset, and the effect of that choice on the depreciation deduction used to
              compute taxable income.




ANSWERS TO MULTIPLE CHOICE




                                                                  9-13
1. c   3. b   5. b          7. d   9. c
2. b   4. d   6. c          8. b   10. c




                     9-14
9-15
SOLUTIONS TO EXERCISES


E9-1

       The following are included in the cost:

 1.Contract price
 3.Freight costs
 6.Installation costs
 7.Testing costs
 8.Overhaul costs before use
 9.Costs of grading land prior to construction
10.Tax assessment for street improvements
11.Delinquent property taxes on property acquired
13.Cost of insurance during construction (could be expensed)
15.Interest costs during construction (not imputed interest)
16.Landscaping costs
18.Cost of tearing down a building on newly acquired land
19.Replacement of an electric motor in a machine (if benefits are increased)
20.Expansion of the heating/cooling system

The following are not included in the cost:

 2.List price
 4.Discounts taken (unless equal to discounts available, which are not included in the cost)
 5.Discounts not taken
12.Cost of tearing down an old building (already owned)
14.Excess of costs over revenue during development stage
17.Severance pay for employees dismissed because of acquisition
21.Service contract for 2 years on the acquired asset
22.Cost of training new employees


E9-2

       The following are included in property, plant, and equipment:

6.Fully depreciated assets still being used
7.Leasehold improvements

The following are not included in property, plant, and equipment:

1.Idle equipment awaiting sale
2.Land held for future use as a plant site
3.Land held for investment
4.Deposits on machinery not yet received
5.Progress payments on building being constructed
8.Assets leased to others




                                                    9-17
E9-3

       Machine                                                                  213,000*
       Repair Expense                                                            1,000
        Cash                                                                                      214,000

       *$200,000 - ($200,000 x 0.02) + $5,000 + $10,000 + $2,000


E9-4

1.The fair value of the asset is considered to be the cash price of $210,000 and thus the machine is recorded
     at this fair value. Since a $50,000 down payment is made, the remaining $160,000 has to be allocated
     between the note and the preferred stock. In most situations, it would be considered that the 10% fair
     value of the note should take precedence over the agreed value of the preferred stock.

Present value of note: Four annual payments of           $30,000
              Present value factor n=4, i=10%        3.169865*
                                   $95,095.95

*Factor from Table 4 of Appendix D

       Machinery                                                                210,000.00
       Discount on Notes Payable ($120,000 - $95,095.95)       24,904.05
        Notes Payable                                                                             120,000.00
        Preferred Stock, $100 par ($100 x 600)                                   60,000.00
        Additional Paid-in Capital on Preferred Stock                             4,904.05
        Cash                                                                                      50,000.00

Alternatively, if preference was given to the agreed value of the preferred stock, the journal entry to record the
      acquisition would be

Machinery                                                      210,000
    Discount on Notes Payable                                                    20,000
      Notes Payable                                                                               120,000
      Preferred Stock, $100 par                                                                    60,000
      Cash                                                                                         50,000

2.If the $210,000 cash price were not known, the fair value of the note and the agreed value of the preferred
       stock would be used.

Machinery [($120,000 - $24,904.05) +
       $50,000 + $60,000]                                                       205,095.95
    Discount on Notes Payable                                                   24,904.05
      Notes Payable                                                                               120,000
      Preferred Stock, $100 par                                                                    60,000
      Cash                                                                                         50,000




                                                      9-18
E9-5 (AICPA adapted solution)

       Cash equivalent price                                                   $9,500
       Installation costs                                                        300
       Capitalized cost                                                        $9,800

       Machinery                                                                9,800
       Discount on Notes Payable                                                1,500
        Cash                                                                                      1,300
        Notes Payable                                                                            10,000

The asset should be recorded at its cash equivalent price of $9,500 plus installation costs of $300. This forces
     a discount to be reported on the note payable, and interest to be recognized even though recognition of
     interest on a note of less than one year is not required by APB Opinion No. 21.


E9-6 (AICPA adapted solution)

       Land:
        Purchase price                                                         $50,000
        Demolition of old building                                               4,000
        Legal fees                                                               2,000
        Salvaged materials                                                      (3,000)
                                                                               $53,000

       Building:
        Architect's fees                                                       $ 20,000
        Construction costs                                                      500,000
                                                                               $520,000


E9-7

       Acquisition cost                                                        $200,000
       Appraisal                                               20,000
       Total cost                                             $220,000

                                                                                 Appraisal
                                                                               Values % of Total

       Land                                                                    $100,000           40%
       Building                                               125,000            50%
       Equipment                                                                25,000           10%
       Total value                                                             $250,000          100%

       Cost assigned to:

       Land       40% x $220,000 = $ 88,000
       Building 50% x $220,000 = $110,000
       Equipment 10% x $220,000 = $ 22,000
        Total cost assigned      $220,000

                                                     9-19
E9-8

       Denver Company
        Building: Warehouse (new)                                            30,000b
        Accumulated Depreciation: Building                                   50,000
        Loss                                                                 10,000a
         Building: Warehouse (old)                                                            90,000

       aLoss = FV of asset surrendered - BV of asset surrendered
          = $30,000 - $40,000

       bCost   = Fair value of asset surrendered


       Bristol Company
        Building: Warehouse (new)                                            25,000a
        Accumulated Depreciation: Building                                   10,000
         Building: Warehouse (old)                                                            35,000

       aGain   is not recognized (since no boot is received)

       Cost = BV of asset surrendered

Note: Denver Company's journal entry is consistent with alternative 1 in Exhibit 9-2. Bristol Company's
     journal entry is consistent with alternative 2 in Exhibit 9-2.


E9-9

       Denver Company
        Building: Warehouse (new)                                            30,000b
        Accumulated Depreciation: Building                                   50,000
        Loss                                                                 12,000a
         Building: Warehouse (old)                                                            90,000
         Cash                                                                 2,000

       aLoss = FV of asset surrendered - BV of asset surrendered
          = $28,000 - $40,000

       bCost   = FV of asset surrendered + Boot paid = $28,000 + $2,000




                                                        9-20
E9-9 (continued)

     Bristol Company
      Cash                                                                        2,000
      Building: Warehouse (new)                                                  23,333b
      Accumulated Depreciation: Building                                         10,000
       Gain                                                                        333a
       Building: Warehouse (old)                                                              35,000

     aTotal   gain = FV of asset surrendered - BV of asset surrendered

        $5,000 =        $30,000      -     $25,000

Gain recognized =     Boot        x (FV-BV) = $2,000 x $5,000=$333
         Boot + Fair value           ($2,000+$28,000) (rounded)
         of asset received

     bCost    = BV + Gain recognized - Boot received = $25,000 + $333 - $2,000

Note: Denver Company's journal entry is consistent with alternative 3 in Exhibit 9-2. Bristol Company's
     journal entry is consistent with alternative 6 in Exhibit 9-2.


E9-10

     Denver Company
      Building: Warehouse (new)                                                  30,000b
      Accumulated Depreciation: Building                                         50,000
      Loss                                                                        7,000a
      Cash                                                                        3,000
       Building: Warehouse (old)                                                              90,000

     aLoss  = FV of asset surrendered - BV of asset surrendered
         = $33,000 - $40,000

     bCost    = FV of asset surrendered - Boot received = $33,000 - $3,000

     Bristol Company
      Building: Warehouse (new)                                                  28,000b
      Accumulated Depreciation: Building                                         10,000
       Building: Warehouse (old)                                                              35,000
       Cash                                                                      3,000

     aGain    is not recognized (since no boot was received)

     bCost    = BV of asset surrendered + Boot paid = $25,000 + $3,000

Note: Denver Company's journal entry is consistent with alternative 5 in Exhibit 9-2. Bristol Company's
     journal entry is consistent with alternative 4 in Exhibit 9-2.




                                                      9-21
E9-11

    The exchange is of dissimilar productive assets.

    Leonard Company
     Truck                                                           9,000
     Accumulated Depreciation: Machine                              24,000
      Gain                                                           3,000a
      Machine                                                                 30,000

    aGain  = FV of asset surrendered - BV of asset surrendered
        = $9,000 - $6,000

    Wilson Company
     Machine                                                9,000
     Accumulated Depreciation: Truck                                4,000
      Gain                                                          1,000a
      Truck                                                                   12,000

    aGain  = FV of asset surrendered - BV of asset surrendered
        = $9,000 - $8,000


E9-12

    The exchange is of dissimilar productive assets.

    Leonard Company
     Truck                                                           9,000
     Accumulated Depreciation: Machine                              24,000
      Gain                                                           2,500a
      Machine                                                                 6,000
      Cash                                                           500

    aGain  = FV of asset surrendered - BV of asset surrendered
        = $8,500 - $6,000

    Wilson Company
     Machine                                                8,500
     Cash                                                             500
     Accumulated Depreciation: Truck                                 4,000
      Truck                                                         12,000
      Gain                                                           1,000a


    aGain  = FV of asset surrendered - BV of asset surrendered
        = $9,000 - $8,000




                                                  9-22
E9-13 (AICPA adapted solution)

The exchange is of similar productive assets and, therefore, is recorded at cost and not fair value. Minor will
     value Smith's contract at $145,000. Better will value Doe's contract at $140,000.


E9-14

Note: The exercise makes no mention of the capacity at which the company is operating.

1.If the company is operating at full capacity so that the construction causes less regular production to take
       place, the cost of the constructed asset should be as follows:

     Materials and supplies                                                    $20,000
     Direct labor                                                               45,000
     Overhead (50% of direct labor)                                             22,500
     Supervisor's overtime                                                       5,000
                                                                               $92,500

Under this alternative, the construction is accounted for in the same way as regular products. The overtime
    might be excluded if it has been included in the overhead rate. An unfavorable variance might be
    charged to the construction.

If the company is operating with excess capacity, the cost of the constructed asset should be as follows:

     Materials and supplies                                                    $20,000
     Direct labor                                                               45,000
     Overtime - supervisor                                                       5,000
                                                                               $70,000

Since regular production continues, none of the fixed overhead is allocated to the construction project, so
     that the unit cost of the regular products is not reduced. This alternative recognizes that the cost of the
     asset is the additional cost incurred to produce it and that the overhead would be incurred whether or
     not the construction takes place.

Note that these two solutions are the logically desirable results under the conditions described, but there is
     no requirement that companies actually use the alternative in these particular circumstances.

2.If the bid from the outside contractors was $80,000, it is questionable whether the use of the full overhead
       rate is appropriate. The incremental approach seems more reasonable in this situation.

If the bid was $60,000, the Harshman Company has clearly incurred excessive costs to construct the building.
        The building should be recorded at $60,000 and the excess costs should be recorded as a loss on
       construction.




                                                     9-23
E9-15

1.Land                                                          60,000
     Building                                                   40,000
      Donated Capital                                                                           100,000

2.The agreement to employ 350 people for 10 years is disclosed in a note to the financial statements, if
     material.

3.Even though title would not pass to the company for 10 years, the land and building is still recorded on the
     books of the company. Disclosure of the contingency associated with the title is included in the notes to
     the financial statements.


E9-16

1.Capitalized interest = Average cost x Interest rate
                   = [($0 + $700,000)  2] x 12%
                   = $42,000

2.The capitalized interest increases the cost of the building and therefore increases the depreciation expense
     each year of the assets' life.


E9-17

     Capitalized interest = Average cost x Interest rate
                  = [($0 + $6,000,000)  2] x 12%
                  = $360,000

     Interest revenue = Average temporary investment x Interest rate
                = ($8,000,000 - $3,000,000) x 11%
                = $550,000


E9-18

        The following are recorded as capital expenditures:

1.Cost of installing machinery
2.Cost of moving machinery
4.Cost of major overhaul
5.Installation of safety device (unless no economic benefits are realized)
7.Property taxes on land and buildings held for investment
8.Cost of rearranging offices

        The following are recorded as operating expenditures:

3.Repairs as a result of an accident
6.Property taxes on land and buildings
9.Cost of repainting offices

                                                        9-24
10.Ordinary repairs


E9-19

1.a.Successful-efforts method. 40% of drilling is unsuccessful. Therefore:

               40% x $2,000,000 = $800,000 is expensed

     b.Full-cost method. All costs are capitalized, so no drilling expense is recognized.

2.Value on balance sheet (before recording depletion)

     a.Successful-efforts method. 60% of drilling efforts are successful. Therefore:

               60% x $2,000,000 = $1,200,000 appears on the balance sheet
                         as oil and gas properties

     b.Full-cost method. All drilling costs are capitalized; therefore, $2,000,000 appears on the balance sheet
          as oil and gas properties.




                                                    9-25
9-26
SOLUTIONS TO PROBLEMS


P9-1

Adjusting entries at December 31, 2001 to correct the books. All original entries must be reversed out of the
       Land and Buildings account and recorded in correct accounts.

1.Land                                                       24,500
        Land and Buildings                                                                     24,500
       To record purchase, demolition of old
       building, and legal fees in separate
       Land account.

2.Building          2,700
        Land and Buildings                                                                     2,700
       Interest on loan for construction.

3.Building         50,000
        Land and Buildings                                                                     50,000
       To record cost of construction
       in separate Building account.

4.Land Improvements                                                            1,200
       Land and Buildings                                                                      1,200
      Sewer assessment.

5.Land                                                        3,500
         Land and Buildings                                                                    3,500
       Cost of landscaping.
       Note: If the landscaping has a limited
       life, the cost should be recorded in the
       Land Improvements account.

6.Equipment                                                  18,000
       Land and Buildings                                                                      18,000
      Excavation equipment purchase.

7.Building        15,000
        Land and Buildings                                                                     15,000
       Fixed overhead charged to building
       construction (alternatively, this item
       could be charged to regular production
       through Goods in Process).

8.Building          1,000
        Land and Buildings                                                                     1,000
       Cost of insurance during construction
       (alternatively, could be recorded as
       Insurance Expense).



                                                    9-27
9.Profit (Gain) on Construction                                              12,000
         Land and Buildings                                                                   12,000
       Reversing of profit improperly recognized.

P9-1 (continued)

10.Loss Due to Worker's Injury                                                3,000
        Land and Buildings                                                                    3,000
      To expense cost to compensate
      construction worker.

11.Loss Due to Modifications to Building                                      7,500
        Land and Buildings                                                                    7,500
      To expense avoidable costs required by
      inspectors due to planning error.

12.Land                                                      2,500
        Land and Buildings                                                                    2,500
       1998 property tax expense on land
       (alternatively, could be recorded
       as Property Tax Expense).

13.Land and Buildings                                                          700
       Land                                                                                     700
      Credit to Land account for salvage
      value of demolished building.

14.Land and Buildings                                                        14,000
      Loss on Sale of Equipment                                               4,000
       Equipment                                                                              18,000
      To write off equipment sold and recognize
      loss on sale (note that Depreciation should
      have been recorded; however, the total of
      the depreciation and the loss would be $4,000).


P9-2

Note: This question requires knowledge that corrections of errors in prior years are recorded to Retained
      Earnings. This was briefly discussed in Chapter 4.

Adjusting entries at December 31, 2002 to correct the books. The building and machinery should be recorded
       in separate accounts.

Purchase price of $60,000 is a lump-sum purchase:

            Building       $39,000     60%
            Machinery        26,000     40%
                        $65,000     100%

            Machinery is valued at 40% x $60,000 = $24,000
            Building is valued at 60% x $60,000 = $36,000

                                                    9-28
      Machinery                                             24,000
      Building                                              36,000
       Property, Plant, and Equipment                                        60,000


P9-2 (continued)

      Machinery                                               280
      Building                                                420
       Property, Plant, and Equipment                                         700
      The legal fees are allocated in the same
      proportion as the original purchase.

      Retained Earnings                                              2,400
       Property, Plant, and Equipment                                        2,400
      To correct the insurance paid in 2000 that
      was incorrectly recorded in the asset account.

      Property, Plant, and Equipment                                 6,310
       Accumulated Depreciation: Building                                    1,821
       Accumulated Depreciation: Machinery                                   3,035
       Retained Earnings                                                     1,454
      To remove the depreciation of $6,310 incorrectly
      credited to Property, Plant, and Equipment in 2000;
      to credit the correct depreciation to Accumulated
      Depreciation: Building ($36,420  20); to credit
      the correct depreciation to Accumulated Depreciation:
      Machinery ($24,280  8); and to correct the amount
      recorded as depreciation expense by a credit to
      Retained Earnings.

      Retained Earnings                                              2,000
       Property, Plant, and Equipment                                        2,000
      To correct the 2001 repairs that were
      incorrectly recorded in the asset account.

      Building                                              10,000
       Property, Plant, and Equipment                                        10,000
      To properly classify the 2001 addition
      to the building.

      Property, Plant, and Equipment                                 6,879
        Accumulated Depreciation: Building                                   2,347
        Accumulated Depreciation: Machinery                                  3,035
        Retained Earnings                                                    1,497
      To remove the depreciation of $6,879 incorrectly
      credited to Property, Plant, and Equipment in 2001;
      to credit the correct depreciation to Accumulated
      Depreciation: Building [$1,821 + ($10,000  19)]
      (this assumes the addition has the same life as the
      building); to credit the correct depreciation to

                                                   9-29
       Accumulated Depreciation: Machinery ($24,280  8);
       and to correct the amount recorded as depreciation
       expense by a credit to Retained Earnings.

       Repairs Expense                                               3,000
        Property, Plant, and Equipment                                        3,000
       To expense the repairs for 2002,
       before the books are closed.


P9-2 (continued)

       Insurance Expense                                             1,400
       Prepaid Insurance                                             1,400
        Property, Plant, and Equipment                                        2,800
       To correctly classify the 2002 insurance
       payment, before the books are closed.

       Machinery                                             7,000
        Property, Plant, and Equipment                                        7,000
       To correctly classify the machinery
       purchased in 2002.

       Loss on Disposal of Machinery                                  100
       Property, Plant, and Equipment                                 500
       Accumulated Depreciation: Machinery                            200
        Machinery                                                              800
       To correctly record the disposal of the
       machinery in 2002; the machine is 2 years
       old and so has $200 related accumulated
       depreciation.

       Property, Plant, and Equipment                                7,421
        Accumulated Depreciation: Building                                    2,347
        Accumulated Depreciation: Machinery                                   3,810
        Depreciation Expense                                                  1,264
       To remove the depreciation of $7,421
       incorrectly credited to Property, Plant,
       and Equipment in 2002; to credit the
       correct depreciation to Accumulated
       Depreciation: Building; to credit the
       correct depreciation to Accumulated
       Depreciation: Machinery [($24,280 + $7,000 -
       $800)  8]; and to correct the depreciation
       expense before the books are closed.


P9-3

1.Investment in Land                                                 74,000
        Cash                                                                  74,000



                                                      9-30
2.Land                 50,000a
         Buildings                                             150,000b
          Common Stock, $3 par                                                      60,000
          Additional Paid-in Capital on Common Stock                      140,000

         a($60,000    $240,000) x $200,000

         b($180,000    $240,000) x $200,000

3.Machinery and Equipmenta                                                153,000
      Repair Expense                                                       2,000
       Cash                                                                         155,000

         a$120,000   + $7,000 + $10,000 + $16,000

P9-3 (continued)

4.Land Improvements                                                       30,000
        Cash                                                                         30,000

5.Cash               6,000
         Accumulated Depreciation                                         16,000
          Machinery and Equipment                                                    20,000
          Gain on Disposal                                                           2,000

6.Land                 60,000a
         Buildings                                             78,000b
          Investment in Land                                                         37,000
          Cash                                                                      101,000

         a$37,000   + $26,000 - $3,000

         b$60,000   + $18,000 (imputed interest is ignored)

7.Leasehold Improvements                                                  20,000
       Cash                                                                          20,000

8.Machinery and Equipment                                                 32,000
       Cash                                                                          32,000

         Royalty Expense                                                  12,000
          Cash                                                                       12,000


P9-4 (CMA adapted solution)

1.Raw Materials
       Iron castings                                                      $61,040
       Other raw materials                                                50,200    $111,240

         Direct Labor
          Layout (90 x $5.00)                                             $ 450

                                                        9-31
        Electricians [(380 - 80) x $9.00]                                      2,700
        Machinery [(1,100 - 200) x $8.00]                                      7,200
        Heat treatment (100 x $7.50)                                            750
        Assembly [(450 - 100) x $7.00]                                         2,450
        Testing [(180 - 20) x $8.00]                                           1,280
        Additional testing labor [(180 - 20) x $5.00)            800           15,630

       Factory Overhead
        Layout and electricians ($3,150 x 0.70)                $ 2,205
        Machining, heat treatment, assembly,
           testing ($12,480 x 1.00)                                           12,480            14,685
       Interest Paid                                                                            4,260
       Total amount to be capitalized                                                          $145,815


P9-4 (continued)

2.Alternate procedures are possible for two costs--rework costs (affects direct labor, repairs and maintenance,
       and factory overhead) and factory overhead.

       a.Rework costs should be treated as a cost of the period when they are abnormal. Rework costs
            arising from errors that ought not to have occurred should be treated as losses of the period.
            Apparently, this was the case in this situation because the damage resulted from a type of error
            that was not expected. Consequently, rework costs and related repairs and maintenance
            expenses ($1,340) were not capitalized in Requirement 1.

       Rework costs can be capitalized when they are considered normal and can be explained by errors
           resulting from the uncertainties associated with the new machine design. When this occurs,
           rework and repairs and maintenance are necessary to make the machine operational.

       b.There are three alternate ways to allocate overhead costs to self-constructed assets. The method
            followed in Requirement 1 was to assign a full share of all overhead costs to the self-constructed
            asset. The reasoning justifying this treatment is that all productive output should absorb its
            proportionate share of all factory overhead costs.

       A second method is to capitalize variable and traceable fixed overhead (however, there was no
            traceable fixed overhead). Variable and traceable fixed overheads are incurred to build the asset
            and will benefit future periods; consequently, these costs should be capitalized. Nontraceable
            fixed overhead costs would have been incurred in any case so that there is no causal relationship
            between the fixed overhead costs and the self-constructed asset; therefore, these overhead
            costs would not be capitalized.

       A third method is to assign no overhead to the self-constructed asset. The reasoning used in this case
             is that overhead is primarily a fixed expense and chargeable only to normal operations.


P9-5

1.Stock exchanged: 1,000 shares at $25/share = $25,000

       Land                                                    25,000
        Common Stock, $10 par                                                                  10,000

                                                        9-32
        Additional Paid-in Capital on Common Stock                            15,000

2.A charge (debit) to Accumulated Depreciation is the best method for this replacement since a separate value
       for the old engine is not known.

       Accumulated Depreciation: Truck                                         1,000
        Cash (Accounts Payable, etc.)                                                           1,000

P9-5 (continued)

3.Land is acquired:

       Land                                                  50,000
        Preferred Stock, $50 par                                                               25,000
        Additional Paid-in Capital on Preferred Stock                         25,000

The value of $45,000 may be the most conservative, but the value of $50,000 has the advantage of greater
       verifiability. The value at which the stock was traded 2 months ago is out of date.

4.The present value of the 2-year noninterest-bearing note, using the 10% imputed interest rate, is: $10,000 x
       0.826446* = $8,264

       *Factor from Table 3 of Appendix D

       Machinery                                              8,264
       Discount on Notes Payable                                               1,736
        Notes Payable                                                                          10,000


P9-6 (AICPA adapted solution)

1.                                         TOWNSAND COMPANY
                                          Analysis of Land Account
                                                  for 2001

       Balance at January 1, 2001                                                              $ 100,000
       Land site number 621:
       Acquisition cost                                                       $1,000,000
       Commission to real estate agent                                          60,000
       Clearing costs                                        $15,000
       Less: Amounts recovered                               (5,000)            10,000
        Total land site number 621                                                             1,070,000

       Land site number 622:
       Land value                                            $ 200,000
       Building value                                                          100,000
       Demolition cost                                                          30,000
        Total land site number 622                                                              330,000
       Balance at December 31, 2001                                                            $1,500,000


                                            TOWNSAND COMPANY

                                                    9-33
                                        Analysis of Buildings Account
                                                   for 2001

       Balance at January 1, 2001                                                             $800,000
       Cost of new building constructed on
          land site number 622:
        Construction costs                                                   $150,000
        Excavation fees                                                       11,000
        Architectural design fees                                             8,000
        Building permit fee                                                   1,000           170,000
       Balance at December 31, 2001                                                           $970,000
P9-6 (continued)
1. (continued)

                                          TOWNSAND COMPANY
                               Analysis of Leasehold Improvements Account
                                                 for 2001

       Balance at January 1, 2001                                                             $500,000
       Electrical work                                                                         35,000
       Construction of extension to current
         work area ($80,000 x ½)                                                               40,000
       Office space                                                                            65,000
       Balance at December 31, 2001                                                           $640,000


                                          TOWNSAND COMPANY
                              Analysis of Machinery and Equipment Account
                                                for 2001

       Balance at January 1, 2001                                                             $700,000
       Cost of new machines acquired:
        Invoice price                                                        $75,000
        Freight costs                                                         2,000
        Unloading charges                                                     1,500            78,500
       Balance at December 31, 2001                                                           $778,500


2.Items in the fact situation which were not used to determine the answer to Requirement 1 above, and where,
       or if, these items should be included in Townsand's financial statements are as follows:

       a.Land site number 623, which was acquired for $600,000, should be included in Townsand's balance
            sheet as land held for resale.

       b.Painting of ceilings for $10,000 should be included as a normal operating expense in Townsand's
            income statement.

       c.Royalty payments of $13,000 should be included as a normal operating expense in Townsand's
            income statement.


P9-7

                                                    9-34
1.Exchange of similar productive assets

      Hurni Company
       Machine (new)                                                          10,000b
       Accumulated Depreciation: Machine                                      25,000
       Loss                                                                    7,000a
        Machine (old)                                                                        40,000
        Cash                                                                  2,000

      aLoss  = FV of asset surrendered - BV of asset surrendered
          = $8,000 - $15,000

      bCost   = FV of asset surrendered + Boot paid = $8,000 + $2,000

P9-7 (continued)
1. (continued)

      Other Company
       Cash                                                                   2,000
       Machine (new)                                                          8,000a
        Machine (old)                                                                        10,000

      aGain   = 0 (FV of asset surrendered = BV of asset surrendered)

       Cost = BV of asset surrendered + Gain - Boot received
         = $10,000 + 0 - $2,000

Note: Hurni Company's journal entry is consistent with alternative 3 in Exhibit 9-2. The Other Company's
      journal entry is consistent with alternative 6 in Exhibit 9-2.


2.Exchange of dissimilar productive assets: all gains and losses recognized

      Hurni Company
       Building                                                55,000
        Land                                                                  30,000
        Cash                                                                   5,000
        Gain                                                                  20,000a

      aGain  = (FV of asset surrendered - BV of asset surrendered)
          = $50,000 - $30,000

      Other Company
       Cash                                                                    5,000
       Land                                                                   50,000a
        Building                                                              55,000

      aGain   = 0 (FV of asset surrendered = BV of asset surrendered)

       Cost = FV of asset surrendered - Boot received = $55,000 - $5,000



                                                    9-35
3.Exchange of similar productive assets

      Hurni Company
       Machine (new)                                                            13,000a
       Accumulated Depreciation: Machine                                         2,000
        Machine (old)                                                                        13,000
        Cash                                                                    2,000

      aGain    is not recognized (since no boot is received)

        Cost = BV of asset surrendered + Boot paid
           = $11,000 + $2,000
P9-7 (continued)
3. (continued)

      Other Company
       Cash                                                                      2,000
       Machine (new)                                                            18,000a
        Machine (old)                                                                        20,000

      aGain    = 0 (BV of asset surrendered = FV of asset surrendered)

       Cost = BV of asset surrendered + Gain - Boot received
         = $20,000 + 0 - $2,000

Note: Hurni Company's journal entry is consistent with alternative 4 in Exhibit 9-2. The Other Company's
      journal entry is consistent with alternative 6 in Exhibit 9-2.


4.Exchange of similar productive assets

      Hurni Company
       Equipment: Car (new)                                                     4,412b
       Accumulated Depreciation: Equipment                                      2,000
       Cash                                                                      800
        Equipment: Car (old)                                                                  7,000
        Gain                                                                     212a

      aTotal   gain = FV of asset surrendered - BV of asset surrendered
                = $6,800 - $5,000
                = $1,800


              Boot             $800
Gain recognized =           (FV-BV) =         ($1,800) = $212
          Boot + Fair value      ($800+$6,000)
                                    (rounded)
          of asset received

      bCost    = BV of asset surrendered + Gain - Boot = $5,000 + $212 - $800



                                                      9-36
       Other Company
        Equipment: Car (new)                                                  6,800a
         Cash                                                                  800
         Equipment: Car (old)                                                                 6,000

       aGain   = 0 (BV of asset surrendered = FV of asset surrendered)

       Cost = BV of asset surrendered + Boot paid = $6,000 + $800

Note: Hurni Company's journal entry is consistent with alternative 6 in Exhibit 9-2. The Other Company's
      journal entry is consistent with alternative 4 in Exhibit 9-2.


P9-8

1.Exchange of similar productive assets

       Machine (new)                                                         29,000a
       Accumulated Depreciation: Machine                                     15,000
        Machine (old)                                                                        40,000
        Cash                                                                                 4,000

       aGain   is not recognized (since no boot is received)

       Cost = BV of asset surrendered + Boot paid
         = $25,000 + $4,000

Note: This journal entry is consistent with alternative 4 in
Exhibit 9-2.


2.Exchange of similar productive assets

       Machine (new)                                                         34,000b
       Accumulated Depreciation: Machine                                      7,000
       Loss                                                    3,000a
        Machine (old)                                                                        40,000
        Cash                                                                                 4,000

       aLoss = FV of asset surrendered - BV of asset surrendered
          = $30,000 - $33,000

       bCost   = FV of asset surrendered + Boot paid = $30,000 + $4,000

Note: This journal entry is consistent with alternative 3 in
      Exhibit 9-2.


3.Exchange of similar productive assets

       Machine (new)                                                         16,875b
       Accumulated Depreciation: Machine                                     25,000

                                                      9-37
       Cash                                                      5,000
        Machine (old)                                                                      45,000
        Gain                                                                               1,875a

       aTotal   gain = (FV of asset surrendered - BV of asset surrendered)

                 = ($32,000 - $20,000) = $12,000


                     Boot             $5,000
       Gain recognized =           (FV-BV) =          ($12,000)
                 Boot + Fair value     $5,000 + $27,000
                    of asset received
                   = $1,875

       bCost    = BV of asset surrendered + Gain - Boot = $20,000 + $1,875 - $5,000

Note: This journal entry is consistent with alternative 6 in
      Exhibit 9-2.


P9-8 (continued)

4.Exchange of similar productive assets

       Machine (new)                                                             27,000b
       Accumulated Depreciation: Machine                                          9,000
       Loss                                                      4,000a
       Cash                                                      5,000
        Machine (old)                                                                      45,000

       aLoss = FV of asset surrendered - BV of asset surrendered
          = $32,000 - $36,000

       bCost = FV of asset surrendered - Boot received
          = $32,000 - $5,000

Note: This journal entry is consistent with alternative 5 in
      Exhibit 9-2.


5.Exchange of similar productive assets

       Machine (new)                                                             80,000a
       Accumulated Depreciation: Machine                                         70,000
        Machine (old)                                                                      150,000

       aGain    is not recognized (since no boot is received)

       Cost = BV of asset surrendered = $80,000

       Note: This journal entry is consistent with alternative 2 in

                                                       9-38
       Exhibit 9-2.


6.Exchange of similar productive assets

       Machine (new)                                                            90,000b
       Accumulated Depreciation: Machine                                        56,000
       Loss                                                     4,000a
        Machine (old)                                                                     150,000

       aLoss = FV of asset surrendered - BV of asset surrendered
          = $90,000 - $94,000

       bCost   = FV of asset surrendered = $90,000

       Note: This journal entry is consistent with alternative 1 in
       Exhibit 9-2.

7.Exchange of dissimilar productive assets: all gains or losses recognized

       Building                                                200,000
        Gain                                                                               70,000
        Land                                                                              130,000

P9-8 (continued)

8.Exchange of dissimilar productive assets: all gains or losses recognized

       Building                                               200,000
        Gain                                                                               40,000
        Cash                                                                               30,000
        Land                                                                              130,000

9.Exchange of dissimilar productive assets: all gains or losses recognized

       Building                                               200,000
       Cash                                                   20,000
        Gain                                                                               90,000
        Land                                                                              130,000


P9-9

Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]

1.Average costs, 2001 $1,000,000 [($0 + $2,000,000)  2]

       Average costs, 2002 $4,000,000 [($2,000,000 + $120,000) +
                 ($2,120,000 + $3,760,000)  2]

       Average costs, 2003 $8,500,000 [($2,120,000 + $3,760,000 + $458,000) +
                         ($6,338,000 + $4,324,000)  2]

                                                     9-39
       Capitalized interest, 2001 = $1,000,000 x 12%

                        = $120,000

       Capitalized interest, 2002 = ($3,000,000 x 12%) + ($1,000,000 x 9.8%a)

                        = $360,000 + $98,000

                        = $458,000

       Capitalized interest, 2003 = [($3,000,000x12%) + ($5,500,000x9.8%)] x 1/2b

                        = ($360,000 + $539,000) x 1/2

                        = $449,500


       a $ 6,000,000       $14,000,000
       (        x 14%) + (       x 8%)
        $20,000,000        $20,000,000

       bSince the project is completed on June 30, 2003, interest for half a
       year is capitalized.


P9-9 (continued)

2.Total costs = Expenditures + Capitalized interest

                = ($2,000,000 + $3,760,000 + $4,324,000) + ($120,000 +
                          $458,000 + $449,500)

                = $11,111,500


                         Cost - Estimated residual value
       Straight-line depreciation =
                           Estimated service life


                         $11,111,500 - $0
                        =
                             20

                        = $555,575 in 2004

3.The interest capitalization has the following effects on the financial statements:

       Income Statement:



                                                        9-40
2001:Interest expense decreased by $120,000. Net income increased by $120,000.

        2002:Interest expense decreased by $458,000. Net income increased by $458,000.

        2003:Interest expense decreased by $449,500. Net income increased by $449,500.

        Balance Sheet:

        December 31, 2001:Asset (construction in process) increased by $120,000. Retained earnings
                                  increased by $120,000.

        December 31, 2002:Asset (construction in process) increased by $458,000 for a total of $578,000.
                                  Retained earnings increased by $458,000, for a total of $578,000.

        December 31, 2003:Asset (construction in process) increased by $449,500 for a total of $1,027,500.
                                  Retained earnings increased by $449,500, for a total of $1,027,500.

        Cash Flow Statement:

If the company is producing the asset for its own use, the cash paid for the interest that is capitalized is
        included in cash outflows for investing activities instead of cash flows from operating activities. There
        would be no affect if the company was producing the asset for sale to others.


P9-10

Supporting computations: Construction costs, (excluding capitalized interest)
             2001: $ 6,000,000
             2002: $11,460,000
             2003: $ 1,800,000

Average costs = [(Beginning cumulative costs + Ending cumulative costs)  2]

Average costs, 2001 = $ 3,000,000 [($0 + $6,000,000)  2]

         2002 = $12,000,000 [($6,000,000 + $270,000) +
            ($6,270,000 + $11,460,000)  2]

         2003 = $20,000,000 [($6,270,000,000 + $11,460,000 +
             $1,370,000) + ($19,100,000 + $1,800,000)  2]

Capitalized interest, 2001 = $3,000,000 x 12% x 9/12a

                = $270,000

             2002 = ($10,000,000 x 12%) + ($2,000,000 x 8.5%)b

                = $1,370,000

             2003 = [($10,000,000x12%) + ($10,000,000x8.5%)] x 3/12c

                = $512,500

                                                        9-41
Interest revenue, 2001 = ($10,000,000 - $3,000,000) x 11%

               = $770,000

Interest expense, 2001 = ($20,000,000 x 10%) + ($60,000,000 x 8%) +
                            ($10,000,000 x 12%) - $270,000

               = $2,000,000 + $4,800,000 + $1,200,000 - $270,000

               = $7,730,000

            2002 = $2,000,000 + $4,800,000 + $1,200,000 - $1,370,000

               = $6,630,000

            2003 = $2,000,000 + $4,800,000 + $1,200,000 - $512,500

               = $7,487,500

aSince activities were suspended for 3 months, interest is only capitalized
for 9 months.


b$20,000,000  $60,000,000
      x 10% +      x 8%
$80,000,000   $80,000,000

cSince the project is completed on March 31, 2003, interest for three months
is capitalized.
P9-10 (continued)

1.Journal entries, 2001:
       Construction in Progress                                                6,000,000
        Cash                                                                                6,000,000

         Cash [($10M - $3M) x 0.11]                                             770,000
          Interest Revenue                                                                   770,000

         Interest Expense                                                      7,730,000
         Construction in Progress                                               270,000
          Cash [($10Mx0.12)+($20Mx0.10)+($60Mx0.08)]                           8,000,000

         Journal entries, 2002:
         Construction in Progress                                              11,460,000
          Cash                                                                              11,460,000

         Interest Expense                                                      6,630,000
         Construction in Progress                                              1,370,000
          Cash                                                                              8,000,000

         Journal entries, 2003:

                                                     9-42
        Construction in Progress                                              1,800,000
         Cash                                                                                  1,800,000

        Interest Expense                                                      7,487,500
        Construction in Progress                                               512,500
         Cash                                                                                  8,000,000

        Power Plant                                                           21,412,500*
         Construction in Progress                                                              21,412,500

        *$6,000,000 + $270,000 + $11,460,000 + $1,370,000 + $1,800,000 + $512,500


2.If the 3 month suspension was due to an environmental dispute, activities would still be in progress
        according to FASB Statement No. 34. Therefore interest for a full year would be capitalized in 2001
        ($3,000,000 x 12% = $360,000) and therefore the journal entry to record the interest payment would be:

        Interest Expense                                                      7,640,000
        Construction in Progress                                               360,000
         Cash                                                                                  8,000,000


P9-11

        2001
        Jan. 10 Accumulated Depreciation: Machinery              800
                      Cash (Accounts Payable, etc.)                                 800
                     Replacement of motor.

                24     Cash                                                       400
                       Accumulated Depreciation: Machinery                       9,000
                       Loss on Sale of Machinery                                  600
                        Machinery                                                                10,000
                       Sale of machine.

        Feb. 3 Loss on Demolition of Building                   1,700
                     Materials Inventory                                            500
                     Accumulated Depreciation: Building        25,000
                      Building                                                                   25,000
                      Cash (Accounts Payable, etc.)                              2,200
                     Demolition of old building.

                14     Repair Expense                                               700
                        Cash (Accounts Payable, etc.)                               700
                       Repairs to machine.

        Mar. 10 Repair Expense                                                   2,000
                        Cash (Accounts Payable, etc.)                            2,000
                       Repairs due to accident.

                19     Machinery                                                    900
                        Cash (Accounts Payable, etc.)                               900

                                                    9-43
                      Replacement of motor.

               27     Office Fixtures                             700
                      Office Expenses                             300
                       Cash (Accounts Payable, etc.)             1,000
                      Office rearrangement.


P9-12 (AICPA adapted solution)

1.Adjusting journal entries, December 31, 2001

(1)Buildings             2,000
         Machinery and Equipment                                         2,000
       To correct the recording of the cost of
       constructing the small storage building.

(2)Due from Officers                                       600
        Machinery and Equipment                                           600
       To correct the recording of the cost of the
       power lawnmower purchased for the personal
       use of the president.

P9-12 (continued)
1. (continued)

(3)Accumulated Depreciation: Machinery and Equipment       180
      Gain or Loss on Retirement of Machinery and
        Equipment                                          420
       Machinery and Equipment                                            600
      To record retirement of damaged fork lift truck
      battery; the asset has been depreciated for 3
      years at $60 per year.

(4)Prepaid Equipment Rental Expense                               180
       Equipment Rental Expense                                   180
         Gain or Loss on Retirement of Machinery
           and Equipment                                                  40
         Machinery and Equipment                                          320
       To remove equipment rental expense and prepayment
       from Machinery and Equipment account.

(5)Machinery and Equipment                                        150
      Accumulated Depreciation: Machinery and Equipment          1,500
       Gain or Loss on Retirement of Machinery and
          Equipment                                               150
       Machinery and Equipment                                           1,500
      To record retirement of Rockwood saw and gain
      on sale.




                                                  9-44
(6)Machinery and Equipment Held for Sale                                    1,800
      Accumulated Depreciation: Machinery and Equipment                     2,500
      Gain or Loss on Retirement of Machinery and
         Equipment                                                700
       Machinery and Equipment                                                      5,000
      To record retirement of casting machine and
      write-down to its market value.

(7)Machinery and Equipment                                                  6,964
      Interest Expense                                                        36
       Notes Payable                                                                7,000
      To record full cost of baking oven purchased
      on installment payment plan and interest
      charges paid in December.

(8)Accumulated Depreciation: Machinery and Equipment              240
       Depreciation Expense: Machinery and Equipment                         240
      To correct recording of depreciation:
      Recorded by company $2,800
      Correct depreciation (2,560) (see schedule C)
      Correction         $ 240

P9-12 (continued)

2.Schedules
                                       THE DEWOSKIN COMPANY
                                  Machinery and Equipment Acquisitions
                                           December 31, 2001

                                               (Schedule A)
      Burnham grinder                                                    $ 1,200
      Air compressor                                                      2,500
      Electric spot welder                                                4,500
      Baking oven                                             10,000
       Total                                                  $18,200


                                         Machinery and Equipment

                                               (Schedule B)

           Balance        2001          2001       Balance
           12/31/00    Retirements Additions 12/31/01
      1990 $ 5,900         $1,500 (5)       --      $ 4,400
      1991      400        --         --          400
      1992     --       --         --          --
      1993     --       --         --          --
      1994     3,900        --         --       3,900
      1995     --       --         --          --
      1996     5,300       5,000 (6)      --          300
      1997     --       --         --          --

                                                     9-45
      1998      4,200     600 (3)       --       3,600
      1999       --   --          --        --
      2000      5,700    --          --        5,700
      2001       --   --        $18,200         18,200
             $25,400 $7,100           $18,200      $36,500


                                           Accumulated Depreciation

                                                  (Schedule C)

           Balance         2001          2001        Balance
           12/31/00     Retirements Provision 12/31/01
      1990 $ 5,900          $1,500 (5)        --       $ 4,400
      1991       380        --        $ 20           400
      1992      --       --           --         --
      1993      --       --           --         --
      1994     2,535         --           390        2,925
      1995      --       --           --         --
      1996     2,385        2,500 (6)        280          165
      1997      --       --           --         --
      1998     1,050          180 (3)       390         1,260
      1999      --       --           --         --
      2000       285        --           570          855
      2001      --       --            910          910
            $12,535     $4,180           $2,560        $10,915

P9-13 (AICPA adapted solution)

1.Depreciation Expense: Building                                             200.00
       Accumulated Depreciation: Building                                               200.00
      To record one-half year's depreciation
      on old boiler ($10,000 x 4% x 1/2).

2.Building             2,000.00
        Gain or Loss on Disposition of Fixed Assets                         2,000.00
       To correct the recording of insurance recovery.

3.Purchase Discountd                                              274.40
      Fuel Expensea                                               741.60
      Fuel Inventorya                                              82.40
      Accumulated Depreciation: Buildingb                                   6,200.00
      Gain or Loss on Disposition of Fixed Assetsc               2,320.00
       Building                                                                        9,618.40
      To correct the recording of the purchase of
      the new boiler and the trade-in of the old.

      aComputation    of fuel expense
        Fuel oil included in invoice
          price of new boiler
          (1,000 gallons at $0.80)                                $800.00
        Sales tax at 3%                                            24.00

                                                      9-46
         Fuel cost        $824.00

                           100
         Less: Fuel inventory ($824 x        )                    (82.40)
                          1,000
         Fuel expense $741.60

       bComputation    of accumulated depreciation on building:

               $10,000 x 4% x 15½ years = $6,200.00

       cComputation    of gain or loss on disposition of fixed assets:

               Cost of old boiler                              $10,000.00
               Accumulated depreciation                         (6,200.00)
               Book value at time of explosion                 $ 3,800.00
               Less trade-in allowance
                 (fair market value)                            (1,480.00)
                Tentative loss on disposition                  $ 2,320.00

       dComputation    of cash discount on purchase of boiler:

               Invoice price                                                 $16,000.00
               Less: Fuel oil included in
                    invoice price                              $ 800.00
                   Trade-in allowance                           1,480.00     (2,280.00)
                                                                             $13,720.00

               Purchases discount at 2%                                      $ 274.40


P9-13 (continued)

4.Building                1,000.00
        Repair Expense                                                                      1,000.00
       To correct the recording of the
       cost of installation of the boiler.

5.Depreciation Expense: Buildinge                                               22.19
       Accumulated Depreciation: Building                                                    22.19
      To correct recorded depreciation expense
      on the building and the new boiler.

       eCost of building                                                     $100,000.00
        Less cost of old boiler (depreciation
          recorded in entry no. 1)                                           (10,000.00)
        Cost subject to full year of depreciation              $ 90,000.00

        Depreciation at 4%                                                                 $ 3,600.00
        Cost of new boiler                                                   $ 16,381.60

        Depreciation on new boiler

                                                      9-47
          ($16,381.60  9½ x ½)                                                                    862.19
        (New boiler is depreciated over
        remaining life of the buildings)

        Total adjusted depreciation                                                              $ 4,462.19
        Depreciation recorded                                                                     (4,440.00)
         Depreciation adjustment required                                                        $ 22.19

        Cost of new boiler:

         Invoice price                                                             $16,000.00
         Less: Fuel oil                                                                           (800.00)
             Remainder                                                                           $15,200.00

         Add: Sales tax                                                            $ 456.00
             Installation                                                            1,000.00     1,456.00
          Total                                                                    $16,656.00
         Less: Cash discount                                                                      (274.40)
             Cost of new boiler                                                                  $16,381.60


P9-14

1.a.Successful-efforts method: The cost of dry wells (50% x $5 million) is expensed in 2001. The cost of
            successful wells (50% x $5 million) is capitalized in 2001 and expensed over the life of the wells.

On the income statement for 2002, cost depletion expense is reported at $250,000 (10% x $2.5 million).

        On the 2002 ending balance sheet, the asset is reported at a net value of $2,250,000 (the $2,500,000
             cost less the $250,000 depletion).

        b.Full-cost method: The total cost of $5 million is capitalized in 2001.

On the income statement for 2002, cost depletion expense is reported at $500,000 (10% x $5 million).

        On the 2002 ending balance sheet, the asset is reported at a net value of $4,500,000 (the $5 million cost
             less the $500,000 depletion).

2.Small oil companies generally prefer the full-cost method because it results in higher asset values on the
      balance sheet and delaying the recognition of expenses in the income statement.




                                                      9-48

				
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