Four accounting questions

1)    Early in its fiscal year ending December 31, 2013, San Antonio Outfitters finalized plans to expand operations. The first stage was completed on March 28 with the purchase of a tract of land on the outskirts of the city. The land and existing building were purchased for $820,000. San Antonio paid $210,000 and signed a noninterest bearing note requiring the company to pay the remaining $610,000 on March 28, 2015. An interest rate of 6% properly reflects the time value of money for this type of loan agreement. Title search, insurance, and other closing costs totaling $21,000 were paid at closing.

     During April, the old building was demolished at a cost of $71,000, and an additional $51,000 was paid to clear and grade the land. Construction of a new building began on May 1 and was completed on October 29. Construction expenditures were as follows (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

  May 30

$

1,350,000

  July 30

1,550,000

  September 1

960,000

  October 1

1,860,000

     San Antonio borrowed $3,000,000 at 6% on May 1 to help finance construction. This loan, plus interest, will be paid in 2014. The company also had the following debt outstanding throughout 2013:

  $2,100,000, 7% long-term note payable

  $4,100,000, 4% long-term bonds payable

     In November, the company purchased 10 identical pieces of equipment and office furniture and fixtures for a lump-sum price of $610,000. The fair values of the equipment and the furniture and fixtures were $426,000 and $284,000, respectively. In December, San Antonio paid a contractor $290,000 for the construction of parking lots and for landscaping.

Required:

1.

Determine the initial values of the various assets that San Antonio acquired or constructed during 2013. The company uses the specific interest method to determine the amount of interest capitalized on the building construction.

2.

How much interest expense will San Antonio report in its 2013 income statement?

2)    Consider each of the transactions below. All of the expenditures were made in cash.

1.

The Edison Company spent $30,000 during the year for experimental purposes in connection with the development of a new product.

2.

In April, the Marshall Company lost a patent infringement suit and paid the plaintiff $11,000.

3.

In March, the Cleanway Laundromat bought equipment. Cleanway paid $24,000 down and signed a noninterest-bearing note requiring the payment of $27,000 in nine months. The cash price for this equipment was $43,000.

4.

On June 1, the Jamsen Corporation installed a sprinkler system throughout the building at a cost of $46,000.

5.

The Mayer Company, plaintiff, paid $30,000 in legal fees in November, in connection with a successful infringement suit on its patent.

6.

The Johnson Company traded its old machine with an original cost of $16,400 and a book value of $8,400 plus cash of $11,600 for a new one that had a fair value of $15,400. The exchange has commercial substance.

Required:

Prepare journal entries to record each of the above transactions.

3 )     On May 1, 2013, Hecala Mining entered into an agreement with the state of New Mexico to obtain the rights to operate a mineral mine in New Mexico for $9 million. Additional costs and purchases included the following (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.):

  Development costs in preparing the mine

$

2,200,000

  Mining machinery

117,000

  Construction of various structures on site

24,500

     After the minerals are removed from the mine, the machinery will be sold for an estimated residual value of $12,000. The structures will be torn down.

     Geologists estimate that 700,000 tons of ore can be extracted from the mine. After the ore is removed the land will revert back to the state of New Mexico.

     The contract with the state requires Hecala to restore the land to its original condition after mining operations are completed in approximately four years. Management has provided the following possible outflows for the restoration costs:

Cash Outflow

Probability

$

500,000

40

%

600,000

30

%

700,000

30

%

     Hecala’s credit-adjusted risk-free interest rate is 7%. During 2013, Hecala extracted 110,000 tons of ore from the mine. The company’s fiscal year ends on December 31.

Required:

1.

Determine the amount at which Hecala will record the cost of the mine.

2.

Calculate the depletion of the mine and the depreciation of the mining facilities and equipment for 2013, assuming that Hecala uses the units-of-production method for both depreciation and depletion.                        Depletion                    Depreciation of  Machinery              Depreciation of  Structures