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E 10-17
Alatorre Corporation
Machine 405
Accumulated Depreciation 140
Loss on Disposal of Machine 65
Machine 290
Cash 320
Computation of loss:
Book Value of old machine €150
Fair value of old machine (85)
Loss on disposal 65
Mills Business Machine Company
Cash 320
Inventory 85
Cost of Good Sold 270
Sales 405
Inventory 270
P 10-7
(capitalization of interest) laseewords inc. is a book distributor that had been operation in its original facility
1985. Then increase in certification programs and continuing education requipments in several professions
has contributed to an annual growth rate of 15% for laserwords since 2005. Laserword original facility
became obsolete by erly 2010 because of the increased sales volume and the fact that laserword now
carries tapes and disks in addition to books.
On june 1, 2010, laserword contracted with black construction to have a new building contructed for
$4,000,000 on land owned by laserword. The payments made by laserword to black construction are show
in the schedule below.
Date Amount
July 30, 2010 $ 900,000
January 30, 2011 1,500,000
May 30, 2011 1,600.000
Total payments $4,000,000
Construction was completed and the building was ready for occupancy on may 27, 2011. Laserwords had
no new borrowings directly associated with the new building but had the following debt outstanding at
may 31, 2011, the end of its fiscal year.
 10%, 5-year note payable of $2,000,000 , dated april 1, 2007, with interest payable annually on
april 1.
 12%, 10-year bond issue of $3,000,000 sold at par on june 30, 2003, with interest payable annually
on june 30.
The new building qualifies for interest capitalization. The effect capitalizing the interest on the new building
, compared with the effect of expensing the interest, is material.
Instructions
a) Compute the wighted-average accumulated expenditure on laserwords new building during the
capitalization period.
b) Compute the avoidable interest on laserwords new building
c) Some interest cost of laserwords Inc. is capitalized for the ended may 31,2011
1) Indentify the items relating costs that must be disclosed in laserwords financial statements
2) Compute the amount of each of the items that must be disclosed
(a) Computation of Weighted-Average Accumulated Expenditures
Expenditures
Date Amount X Capitalization Weighted-Average
Period = Accumulated Expenditures
July 30, 2010 $ 900,000 10/12 $ 750,000
January 30, 2011 1,500,000 4/12 500,000
May 30, 2011 1,600,000 0 0
$4,000,000 $1,250,000
(b)
Weighted-Average Capitalization Avoidable
Accumulated Expenditures X Rate = interest
$1,250,000 X 11.2%* = $140,000
Loans Outstanding During Construction Period
Principal Actual Interest
*10% five-year note $2,000,000 $200,000
12% ten-year bond 3,000,000 360,000
$5,000,000 $560,000
 Capitalization rate = Total interest ÷ Total principal
= 560,000 ÷ 5,000,000
= 11.2% (capitalization rate
(a) (1) and (2)
Total actual interest cost $560,000
Total interest capitalized $140,000
Total interest expensed $420,000
E11-24
December 31, 2010

Land 20,000
Unrealized Gain on Revaluation—Land 20,000
December 31, 2011

Loss on Impairment 20,000
Land 40,000
December 31, 2012

Land 25,000
Recovery of Impairment Loss 20,000
E11-27 (Revaluation Accounting)
Falcetto Company acquired equipment on January 1, 2009, for $12,000. Falcetto elects to value this class
of equipment using revaluation accounting. This equipment is being depreciated on a straight-line basis
over its-6-year useful lie. There is no residual value at the end of 6-year period. The appraised value of the
equipment approximates the carrying amount at December 31, 2009 and 2011. On December 31, 2010,
the fair value of the equipment is determined to be $7,000.
Instructions :
(a) Prepare the journal entries for 2009 related to the equipment
(b) Prepare the journal entries for 2010 related to the equipment
(c) Determine the amount of depreciation expense that Falcetto will record on the equipment in 2011
Anwers :
(a) January 1, 2009
Equipment........................................................ 12,000
Cash ....................................................................................12,000
December 31, 2009
Depreciation Expense ...................................... 2,000
Accumulated Depreciation-Equipment............................... 2,000
(b) December 31, 2010
Depreciation Expense ...................................... 2,000
Accumulated Depreciation-Equipment............................... 2,000
Accumulated Depreciation-Equipment ............ 4,000

Loss on Impairment ......................................... 1,000
Equipment .......................................................................... 5,000
(c) Depreciation Expense-2011 : ($12,000 - $5,000) / 4 = $1,750

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E 10-17

Accumulated Depreciation 140

Loss on Disposal of Machine 65

Book Value of old machine €150

Fair value of old machine (85)

Mills Business Machine Company

Cost of Good Sold 270

July 30, 2010 $ 900,000

January 30, 2011 1,500,000

May 30, 2011 1,600.000

Total payments $4,000,000

Date Amount X Capitalization Weighted-Average

Period = Accumulated Expenditures

July 30, 2010 $ 900,000 10/12 $ 750,000

January 30, 2011 1,500,000 4/12 500,000

May 30, 2011 1,600,000 0 0

Weighted-Average Capitalization Avoidable

Accumulated Expenditures X Rate = interest

$1,250,000 X 11.2%* = $140,000

Loans Outstanding During Construction Period

Principal Actual Interest

*10% five-year note $2,000,000 $200,000

12% ten-year bond 3,000,000 360,000

= 11.2% (capitalization rate

(a) (1) and (2)

Total actual interest cost $560,000

Total interest capitalized $140,000

Total interest expensed $420,000

December 31, 2010

December 31, 2011

December 31, 2012

(a) January 1, 2009

December 31, 2009

Depreciation Expense ...................................... 2,000

Accumulated Depreciation-Equipment............................... 2,000

(b) December 31, 2010

Depreciation Expense ...................................... 2,000

Accumulated Depreciation-Equipment............................... 2,000

Accumulated Depreciation-Equipment ............ 4,000

Equipment .......................................................................... 5,000

(c) Depreciation Expense-2011 : ($12,000 - $5,000) / 4 = $1,750

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