Question Details

Gibbs Manufacturing Co. was incorporated 



Pr. 1—Capitalizing acquisition costs.
Gibbs Manufacturing Co. was incorporated on 1/2/10 but was unable to begin manufacturing activities until 8/1/10 because new factory facilities were not completed until that date. The Land and Building account at 12/31/10 per the books was as follows:
  Date  	Item	  Amount	
1/31/10	Land and dilapidated building	$200,000
2/28/10	Cost of removing building	4,000
4/1/10	Legal fees	6,000
5/1/10	Fire insurance premium payment	5,400
5/1/10	Special tax assessment for streets	4,500
5/1/10	Partial payment of new building construction	150,000
8/1/10	Final payment on building construction	150,000
8/1/10	General expenses	30,000
12/31/10	Asset write-up	    75,000
		$624,900
Additional information:
1.	To acquire the land and building on 1/31/10, the company paid $100,000 cash and 1,000 ordinary shares of its (par value = $100/share) which is very actively traded and had a market value per share of $170.
2.	When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also received $1,500 from the sale of salvaged material.
3.	Legal fees covered the following:
		Cost of organization	$2,500
		Examination of title covering purchase of land	2,000
		Legal work in connection with the building construction	  1,500
			$6,000
4.	The fire insurance premium covered premiums for a three-year term beginning May 1, 2010.
5.	General expenses covered the following for the period 1/2/10 to 8/1/10.
		President's salary	$20,000
		Plant superintendent covering supervision of new building	  10,000
			$30,000
6.	Because of the rising land costs, the president was sure that the land was worth at least $75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/10 for a separate land account and a separate building account. Use separate T-accounts (one for land and one for building) labeling all the relevant amounts and disclosing all computations.

 
Pr. 2—Capitalization of interest.
During 2010, Barden Building Company constructed various assets at a total cost of $8,400,000.  The weighted average accumulated expenditures on assets qualifying for capitalization of interest during 2010 were $5,600,000. The company had the following debt outstanding at 
December 31, 2010:

1.	10%, 5-year note to finance construction of various assets, 
	dated January 1, 2010, with interest payable annually on January 1	$3,600,000

2.	12%, ten-year bonds issued at par on December 31, 2004, with interest 
	payable annually on December 31	4,000,000

3.	9%, 3-year note payable, dated January 1, 2009, with interest payable 
	annually on January 1	2,000,000

Instructions
Compute the amounts of each of the following (show computations).
1.	Avoidable interest.
2.	Total interest to be capitalized during 2010.



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