1. Exercise 1
E.10-8, On December 31, 2003, Alma Ata Inc, borrowed $ 3,000,000 at 12 % payable annually to finance the construction of a new building. In 2004, the company made the following expenditures related to this building, March 1, $ 360,000, June 1, $ 600,000, July 1, $ 1,500,000, December 1, $ 1,500,000. Additional information is provided as follows :
Other debt outstanding :
10 year, 13 % bond, December 31, 1997,
interest payable annually was $ 4,000,000
6 year, 10 % note, dated December 31, 2001,
interest payable annually was $ 1,600,000
March 1, 2004, expenditure included land costs of $ ,000
Interest revenue earned in $ ,000
Instruction :
a. Determine the amount of interest to be capitalized in 2004 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, 2004.

2. Answer of Exercise 1
Computation of Weighted Average Accumulated Expenditures
_ Expenditures _
Date Amount x Capitalization Period = W Average
Acc Expenditures
March 1 $ ,000 x 10/ = $ ,000
June $ ,000 x 7/ = $ ,000
July $ 1,500,000 x 6/ = $ ,000
Dec $ 1,500,000 x 1/ = $ ,000
$ 3,960, $ 1,525,000

3. Answer of Exercise 1
W Avg Acc Expenditures x Interest Rate = Avoidable Interest
$ 1,525, x % = $ 183,000
Actual Interest
$ 3,000,000 x 12 % = $ ,000
$ 4,000,000 x 13 % = $ ,000
$ 1,600,000 x 10 % = $ ,000
$ 1,040,000
Avoidable interest lower than actual
b. Building $ 183,000
Interest Expense $ 857,000
Cash $ 1,040,000 ( )
Actual interest for year $ 1,040,000
Amount capitalized ($ ,000)
Interest expense debit $ ,000

4. Exercise 2
E.10-13, Presented below is information related to Zonker Company.
On July 6 Zonker Company acquired the plant assets to Doonesbury Company, which had discontinued operations. The appraised value of the property is :
Land $ ,000
Building $ 1,200,000
Machinery and equipment $ ,000
Total $ 2,400,000
Zonker Company gave 12,500 shares of its $ 100 par value common stock in exchange. The stock had a market value of $ 168 per share on the date of the purchase of the property.
2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building
Repairs to building $ 105,000
Construction of bases for machinery to be installed later $ 135,000
Driveways and parking lots $ 122,000
Remodeling of office space in building, including new partitions and walls $ 161,000
Special assessment by city on land $ 18,000
3. On December 20, the company paid cash for machinery $ 260,000 subject to a 2 % cash discount and freight on machinery of $ 10,500.
Instructions :
Prepares entries on the books of Zonker Company for these transactions

5. Answer of Exercise 2 1. Land 350,000 Building 1,050,000
Machinery and Equipment ,000
Common Stock (12,500 x $ 100) ,250,000
Paid-in Capital in Excess of Par ,000
($ 2,100,000 – $ 1,250,000 = $ 850,000)
(The cost of the plant assets is $ 2,100,000, or 12,500 x $ 168,The cost is allocated in proportion to the appraised value: 1/6 to Land, 1/2 to Building, and 1/3 to Machinery and Equipment.)
2. Buildings ($ 105,000 plus $ 161,000) ,000
Machinery and Equipment ,000
Land Improvements ,000
Land ,000
Cash ,000
3. Machinery and Equipment ,300
Cash ,300
($ 10,500 + $ 254,800, which is 98 % of $ 260,000.)

6. Exercise 3
P.10-8, Susquehanna Co, a wishes to exchange a machine used in its operations. Susquehanna has received the following offers from other companies in the industry.
Choctaw Company offered to exchange a similar machine plus $ 23,000
Powhatan Company offered to exchange a similar machine
Shawnee Company offered to exchange a similar machine, but wanted $ 8,000 in addition to Susquehanna’s machine.
In addition, Susquehanna contacted Seminole Corporation, a dealer machines. To obtain a new machine, Susquehanna must pay $ 93,000 in addition to trading in its old machine
Susquehanna Choctaw Powhatan Shawnee Seminole
Machine cost $ 160, $ 120,000 $ 147,000 $ 160,000 $ 130,000
Acc depreciation , , , ,
Fair value , , , , ,000
Instructions :
For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

7. Answer of Exercise 3 1. Susquehanna Corporation Cash 23,000
Machinery (new) ,000
Accumulated Depreciation ,000
Loss on Exchange of Machinery ,000*
Machinery (old) ,000
  *Computation of loss: Book value $ 110,000
Fair value (92,000)
Loss $ ,000   
Choctaw Company
Machinery (new) ,000
Accumulated Depreciation ,000
Loss on Exchange of Machinery ,000*
Cash ,000
Machinery (old) ,000
*Computation of loss: Book value $ 75,000
Fair value (69,000)
Loss ,000

8. Answer of Exercise 3 2. Susquehanna Corporation Machinery (new) 92,000
Accumulated Depreciation ,000
  Loss on Exchange of machinery ,000
  Machinery (old) ,000   
Powhatan Company
  Machinery (new) ($ 92,000 – $ 16,000) ,000*
  Accumulated Depreciation ,000
  Machinery (old) ,000
*Computation of gain deferred : Fair value $ 92,000
  Book value (76,000)
  Gain deferred $ 16,000

9. Answer of Exercise 3 3. Susquehanna Corporation
  Machinery (new) ,000
  Accumulated Depreciation ,000
  Loss on Exchange of machinery ,000
  Machinery (old) ,000
  Cash ,000   
Shawnee Company
  Machinery (new) ,200*
  Accumulated Depreciation ,000
  Cash ,000
  Machinery (old) ,000
  Gain on Exchange of Machinery ,200**
 *[$ 92,000 – ($ 15,000 – $ 1,200)] = $ 78,200
 **Computation of Gain: _ $ 8, _ x ($ 100,000 – $ 85,000) = $ 1,200
$ 8,000 + $ 92,000

10. Answer of Exercise 3 4. Susquehanna Corporation
  Machinery (new) ,000
  Accumulated Depreciation ,000
  Loss on Exchange of machinery ,000
  Machinery (old) ,000
  Cash ,000   
Seminole Company
  Cash ,000
  Used Machine Inventory ,000
  Sales ,000
  Cost of Goods Sold ,000
  Inventory ,000