Exercise 1
Blue Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $4,975,000 on January 1, 2017. Blue expected to complete the building by December 31, 2017. Blue has the following debt obligations outstanding during the construction period.
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Construction loan-10% interest, payable semiannually, issued December 31, 2016
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$2,015,500
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Short-term loan-8% interest, payable monthly, and principal payable at maturity on May 30, 2018
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1,597,400
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Long-term loan-9% interest, payable on January 1 of each year. Principal payable on January 1, 2021
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1,003,600
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Assume that Blue completed the office and warehouse building on December 31, 2017, as planned at a total cost of $5,212,000, and the weighted-average amount of accumulated expenditures was $3,828,400. Compute the avoidable interest on this project.
Compute the depreciation expense for the year ended December 31, 2018. Blue 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 $302,300.
Exercise 2
Pearl Engineering Corporation purchased conveyor equipment with a list price of $9,200. Presented below are three independent cases related to the equipment.
(a) Pearl paid cash for the equipment 8 days after the purchase. The vendor's credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
(b) Pearl traded in equipment with a book value of $2,200 (initial cost $7,400), and paid $9,800 in cash one month after the purchase. The old equipment could have been sold for $300 at the date of trade. (The exchange has commercial substance.)
(c) Pearl gave the vendor a $11,000 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.
Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.
Exercise 3
Sarasota Corporation purchased a computer on December 31, 2016, for $111,300, paying $31,800 down and agreeing to pay the balance in five equal installments of $15,900 payable each December 31 beginning in 2017. An assumed interest rate of 9% is implicit in the purchase price.
Prepare the journal entry at the date of purchase.
Prepare the journal entry at December 31, 2017, to record the payment and interest (effective-interest method employed).
Prepare the journal entry at December 31, 2018, to record the payment and interest (effective-interest method employed).
Exercise 4
Riverbed Company exchanged equipment used in its manufacturing operations plus $3,240 in cash for similar equipment used in the operations of Marin Company. The following information pertains to the exchange.
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Riverbed Co.
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Marin Co.
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Equipment (cost)
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$30,240
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$30,240
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Accumulated depreciation
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20,520
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10,800
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Fair value of equipment
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13,500
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16,740
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Cash given up
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3,240
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Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance
Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance
Exercise 5
The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.
Jan. 30 A building that cost $137,280 in 2000 is torn down to make room for a new building. The wrecking contractor was paid $5,304 and was permitted to keep all materials salvaged.
Mar. 10 Machinery that was purchased in 2010 for $16,640 is sold for $3,016 cash, f.o.b. purchaser's plant. Freight of $312 is paid on the sale of this machinery.
Mar. 20 A gear breaks on a machine that cost $9,360 in 2009. The gear is replaced at a cost of $2,080. The replacement does not extend the useful life of the machine but does make the machine more efficient.
May 18 A special base installed for a machine in 2011 when the machine was purchased has to be replaced at a cost of $5,720 because of defective workmanship on the original base. The cost of the machinery was $14,768 in 2011. The cost of the base was $3,640, and this amount was charged to the Machinery account in 2011.
June 23 One of the buildings is repainted at a cost of $7,176. It had not been painted since it was constructed in 2013.
Prepare general journal entries for the transactions