E10-1 (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land im- provements, 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) (b) Payment for construction from note proceeds (c) Cost of land fill and clearing (d) Delinquent real estate taxes on property assumed by purchaser (e) Premium on 6-month insurance policy during construction
(f) Refund of 1-month insurance premium because construction completed early (g) Architectâ€™s fee on building (h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) (i) Commission fee paid to real estate agency
(j) Installation of fences around property (k) Cost of razing and removing building (l) Proceeds from salvage of demolished building (m) Interest paid during construction on money borrowed for construction (n) Cost of parking lots and driveways (o) Cost of trees and shrubbery planted (permanent in nature) (p) Excavation costs for new building
$(275,000) 275,000 8,000 7,000 6,000
(1,000) 22,000 250,000 9,000 4,000 11,000
(5,000) 13,000 19,000 14,000
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.
Other Item Land Improvements Buildings Accounts
10-3 (Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To im- prove 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 incre-
mental 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.
Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.
Prepare the entry that should have been made at the date of each acquisition.
4 E10-7 (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 loanâ€”12% interest, payable semiannually, issued December 31, 2013
Short-term loanâ€”10% interest, payable monthly, and principal payable at maturity on May 30, 2015
Long-term loanâ€”11% interest, payable on January 1 of each year. Principal payable on January 1, 2018
$2,000,000 1,400,000 1,000,000
(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 expendi- tures 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.