Reference no: EM132455110

Question 1 - Acquisition Costs of Realty

The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) $(275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect's fee on building 22,000

(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Required - Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Question 2 - Acquisition Costs of Trucks

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

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

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

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

4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of $10 and a market price of $13 per share.

Required - Prepare the appropriate journal entries for the above transactions for Clarkson Corporation

Question 3 - Capitalization of Interest

Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2014. Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan-12% interest, payable semiannually, issued $2,000,000 December 31, 2013

Short-term loan-10% interest, payable monthly, and principal payable at 1,400,000 maturity on May 30, 2015

Long-term loan-11% interest, payable on January 1 of each year. Principal 1,000,000 payable on January 1, 2018

Required -

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

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

Question 4 - Nonmonetary Exchanges

Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.

1. Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.)

2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)

3. Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield's machine. (The exchange has commercial substance for both parties.) In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine.

Required - For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.