Exercise 1 - On December 31, 2011, Hurston Inc. borrowed $6,390,000 at 13% payable annually to finance the construction of a new building. In 2012, the company made the following expenditures related to this building: March 1, $766,800; June 1, $1,278,000; July 1, $3,195,000; December 1, $2,556,000. Additional information is provided as follows.
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1.
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Other debt outstanding
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10-year, 12% bond, December 31, 2005, interest payable annually
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$8,520,000
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6-year, 11% note, dated December 31, 2009, interest payable annually
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$3,408,000
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2.
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March 1, 2012, expenditure included land costs of $319,500
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3.
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Interest revenue earned in 2012
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$104,370
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(a) Determine the amount of interest to be capitalized in 2012 in relation to the construction of the building.
(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense, if any, at December 31, 2012.
Exercise 2 - Alatorre Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Alatorre Corporation gave the machine plus $497 to Mills Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.
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Alatorre Corp.
(Old Machine)
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Mills Co.
(New Machine)
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Machine cost
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$451
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$420
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Accumulated depreciation
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218
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-0-
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Fair value
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132
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629
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For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)