Question

2. On January 1, 2018, Kendall Inc. began construction of an automated cattle feeder system. The system was finished and ready for use on September 30, 2019. Expenditures on the project were as follows:

January 1, 2018	$	200,000
July 1, 2018	$	300,000
December 1, 2018	$	600,000
March 31, 2019	$	300,000
September 30, 2019	$	200,000

Kendall borrowed $600,000 on a construction loan at 8% interest on January 1, 2018. This loan was outstanding throughout the construction period. The company had $2,000,000 in 5% bonds payable outstanding in 2018 and 2019. Kendall used the specific interest method.

Interest capitalized for 2018 was:

a. 48,000

b. 40,000

c. 32,000

d. 30,000

3. Pam & Co. exchanged land and $9,000 cash for equipment. The book value and the fair value of the land were $90,000 and $106,000, respectively.

Assuming that the exchange has commercial substance, Lowell would record equipment and a gain/(loss) of:

a. Equipment: 90,000

Gain/loss: (25,000)

b. Equipment: 99,000

Gain/loss: (16,000)

c. Equipment: 106,000

gain/loss: 25,000

d. Equipment: 115,000

gain/loss: 16,000

Answer 1

2)
Date	Amount	Capitalization period	Weighted Average Accumulated Expenditures
January 1, 2018	$ 200,000	12 /12	$ 200,000
July 1, 2018	$ 300,000	6 /12	$ 150,000
December 1, 2018	$ 600,000	1 /12	$ 50,000
Total	$ 1,100,000		$ 400,000
Interest capitalized in 2018    = Weighted Avg. Exp. X Interest Rate	$ 400,000 x 8% =	$ 32,000	Option ( C ) is Correct
3)
Accounts titles and Explanation	Debit ( In $ )	Credit ( In $ )
Equipment    - Bal. Fig. ( $ 106,000 + $ 9,000)	$ 115,000
Gain		$ 16,000
Cash		$ 9,000
Land		$ 90,000
Option (d) is Correct
Gain    = Fair Value (-) Book value    = $ 106,000 (-) $ 90,000     = $ 16,000 (Gain)