Financial Accounting: The Impact on Decision Makers
10th Edition
ISBN: 9781305654174
Author: Gary A. Porter, Curtis L. Norton
Publisher: Cengage Learning
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Chapter 8, Problem 8.11MCE
Capital versus Revenue Expenditures
On January 1, 2014, Jose Company purchased a building for $200,000 and a delivery truck for $20,000. The following expenditures have been incurred during 2016:
• The building was painted at a cost of $5,000.
• To prevent leaking, new windows were installed in the building at a cost of $10,000.
• To improve production, a new conveyor system was installed at a cost of $40,000.
• The delivery truck was repainted with a new company logo at a cost of $1,000.
• To allow better handling of large loads, a hydraulic lift system was installed on the truck at a cost of $5,000.
• The truck’s engine was overhauled at a cost of $4,000.
Required
- Determine which of those costs should be capitalized. Also record the
journal entry for the capitalized costs. Assume that all costs were incurred on January 1, 2016. - Determine the amount of
depreciation for the year 2016. The company uses the straight-line method and depreciates the building over 25 years and the truck over six years. Assume zero residual value for all assets. - How would the assets appear on the
balance sheet of December 31, 2016?
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On January 2, 2017, Indian River Groves began construction of a new citrus processing plant. The
automated plant was finished and ready for use on September 30, 2018. Expenditures for the
construction were as follows:
48.
January 2, 2017
September 1, 2017
December 31, 2017
March 31, 2018
September 30, 2018
$ 600,000
1,800,000
1,800,000
1,800,000
1,200,000
Indian River Groves borrowed $3,300,000 on a construction loan at 12% interest on January 2,
2017. This loan was outstanding during the construction period. The company also had S12,000,000
in 9% bonds outstanding in 2017 and 2018.
The interest capitalized for 2018 was:
a. $374,220
b. $354,915
c. $ 77,220
d. $297,000
VI.
On January 1, 2017, Abraham SA purchased the following two machines for use in
its production process.
Machine A: The cash price of this machine was €55,000. Related expenditures
included: sales tax €3,300, shipping costs €325, insurance during ship-
ping €75, installation and testing costs €1,300, and €90 of oil and lubri-
cants to be used with the machinery during its first year of operation.
Abraham estimates that the useful life of the machine is 4 years with a
€6,000 residual value remaining at the end of that time period.
Machine B: The recorded cost of this machine was €130,000. Abraham estimates that
the useful life of the machine is 5 years with a €10,000 residual value
remaining at the end of that time period.
Instructions
(a) Prepare the following for Machine A.
(1) The journal entry to record its purchase on January 1, 2017.
(2) The journal entry to record annual depreciation at December 31, 2017, assuming
the straight-line method of depreciation is used.
(b) Calculate…
On June 18, 2017, Dell Printing Co. incurred the following costs for one of its printing presses: Purchase of
collating and stapling attachment $84,000 Installation of attachment 36,000 Replacement parts for
overhaul of press 26,000 Labor and overhead in connection with overhaul 14,000 The overhaul resulted in
a significant increase in production. Neither the attachment nor the overhaul increased the estimated
useful life of the press. What amount of the above costs should be capitalized? $120,000 $84,000
$160,000 $0
Chapter 8 Solutions
Financial Accounting: The Impact on Decision Makers
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