Harris Ltd. exchanged a parcel of land with a carrying value of $15 million and fair value of $20 million, for some highly specialized machinery from Biden Corp. In addition, Harris Ltd. also paid $5 million along with the land in a transaction holding commercial substance to obtain the

machinery.

Required:

What will be the cost of the specialized machinery in the financial statements of Harris Ltd.?

ii.

Harris Ltd also recently imported an artificial intelligent machinery and incurred the following costs:

List price (trade discount 12.5% on list price) 480,000

Haulage costs 5,500

Pre-production testing of machinery 25,000

Repair & maintenance contract for three years 48,000

Running of electrical cable for machinery 28,000

Special foundation for mounting machinery 9,000

Labor costs (direct) 15,000

Harris Ltd paid for the machinery within four weeks of the order, therefore, obtained an early settlement discount of 3%.

2

Harris Ltd had wrongly specified the power loading of the original electrical cable to be installed by the contractor. The cost of rectifying this error of $12,000 is included in the above figure of $28,000. The machinery is expected to have a useful life of 20 years. At the end of this period there will be compulsory costs of $30,000 to dismantle the machinery and $6,000 to restore the site to the original condition.

Required:

Determine the capitalized value of the artificial intelligent machinery in the financial statements of Harris Ltd. Explain the treatment in the financials to be given to any cost or item not utilized in computing the capitalized value of the machinery.

Question 2

Trump Company constructed various assets at a total cost of $8,400,000 during 2019. The

weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2019 were $5,600,000. Trump had the following debts outstanding at December 31, 2019:

A. 12%, ten-year bonds issued at par on December 31, 2013, with interest

payable annually on December 31 $4,000,000

B. 9%, 3-year note payable, dated January 1, 2018, with interest payable

annually on January 1 $2,000,000

C. 10%, 5-year note to finance construction of various assets,

dated January 1, 2019, with interest payable annually on January 1 $3,600,000

Required:

Compute the amounts of each of the following. Show all workings.

i. Avoidable interest.

ii. Total interest to be capitalized during 2019. Explain the rational for the decision.

Question 3

Banks Beer PLC (BBP), manufacturer, wholesaler and retailer of beers, made the following

property, plant and equipment acquisitions during the year 2019. The following journal entries were presented to you by the new and inexperienced Accounts Clerk under your supervision for review.

Jan 20: BBP built a warehouse for $600,000. It could have purchased a warehouse building for $740,000. The entry made was:

Building $740,000

Cash $600,000

Profit on Construction 140,000

Mar 1: BBP purchased office equipment for $20,000, terms 2/10, n/30. Because BBP intended to take the discount, it made no entry until it paid for the acquisition. The entry made was:

Equipment $20,000

Cash $19,600

Purchase Discounts 400

Apr 4: BBP purchased store equipment by making a $2,000 cash down payment and signing a 1-year $23,000, 10% note payable. The acquisition was recorded as follows:

Equipment $27,300

Cash $ 2,000

Note Payable 23,000

Interest Payable 2,300

Jun 12: BBP acquired land, buildings and equipment from Corona Ltd, a bankrupt company, for a lump-sum amount of $680,000. At the time of the purchase, Corona's assets had the

following book and appraisal values.

Book Values Appraisal Values

Land $200,000 $150,000

Buildings 230,000 350,000

Equipment 300,000 300,000

To be conservative, the Accounts Clerk decided to take the lower of the two values for each

asset acquired. The following entry was made:

Land $150,000

Buildings 230,000

Equipment 300,000

Cash $680,000

Required:

Review all of the accounting entries made by your junior staff and make any necessary

correction to reflect the entry that should have been made at the date of each acquisition.