139 CHAPTER 11 Problem 11-1 Problem 11-4 A C C A D 10 A C A D B Problem 11-2 B D B A C Problem 11-3 D D C A C B C D A A Problem 11-5 Equity method Investment in associate Cash 2,400,000 2,400,000 Acquisition cost Net assets acquired (20% x 8,000,000) Goodwill Investment in associate Investment income (20% x 1,500,000) 300,000 2,400,000 1,600,000 800,000 300,000 Memo – Received 2,000 shares as 10% stock dividend on 20,000 original shares Shares now held, 22,000 Investment loss Investment in associate (20% x 300,000) Cash (20% x 500,000) Investment in associate 60,000 60,000 100,000 Cash (5,500 x 200) Investment in associate Gain on sale of investment 100,000 1,100,000 635,000 465,000 Sales price Less: Cost of investment sold (5,500/22,000 x 2,540,000) 635,000 Gain on sale 1,100,000 465,000 Cost method Investment in equity securities Cash No entry 2,400,000 2,400,000 140 Memo – Received 2,000 shares as 10% stock dividend Shares now held, 22,000 No entry Cash 100,000 Dividend income 100,000 1,100,000 Investment in equity securities (5,500/22,000 x 2,400,000) 600,000 Gain on sale of investment 500,000 Cash Problem 11-6 Investment in equity securities Cash Cash (15% x 4,000,000) Dividend income (15% x 3,000,000) 450,000 Investment in equity securities (15% x 1,000,000) 150,000 6,000,000 6,000,000 600,000 Problem 11-7 2008 Investment in associate Cash Investment in associate Investment income (30% x 4,000,000 x 3/12) 300,000 Cash (30% x 3,000,000) Investment in associate 900,000 50,000 2009 Investment income Investment in associate (200,000 x 3/12) Investment in associate Investment income (30% x 6,000,000) Cash (30% x 5,000,000) Investment in associate 5,000,000 5,000,000 300,000 900,000 50,000 1,800,000 1,800,000 1,500,000 1,500,000 Investment income Investment in associate 200,000 200,000 141 Problem 11-8 2006 Jan Investment in equity securities Cash Dec 31 Cash (15% x 300,000) Dividend income 1,000,000 45,000 45,000 2007 Dec 31 Cash (15% x 400,000) Dividend income 60,000 2008 Jan Investment in associate Cash 3,000,000 Investment in associate Retained earnings 1,000,000 60,000 3,000,000 75,000 75,000 Investment income – Equity method (2006 and 2007) 180,000 (15% x 500,000 + 700,000) Dividend income – Cost method (2006 and 2007) (45,000 + 60,000) 105,000 Cumulative effect of change to equity 75,000 Investment in associate Investment in equity securities 1,000,000 (Reclassification) Dec 31 Investment in associate Investment income (40% x 900,000) 360,000 31 Cash (40% x 600,000) Investment in associate 240,000 1,000,000 360,000 240,000 Problem 11-9 2008 Jan Investment in associate Cash 8,000,000 Dec 31 Investment in associate 1,500,000 8,000,000 Investment income (30% x 5,000,000) 1,500,000 31 Cash (30% x 2,000,000) Investment in associate 600,000 600,000 142 2009 June 30 Investment in associate Investment income (30% x 6,000,000) 1,800,000 July Cash 5,350,000 1,800,000 6,000,000 Investment in associate (10,700,000 x 1/2) Gain on sale of investment Oct Cash (2,500,000 x 15%) Dividend income Dec 31 650,000 375,000 Available for sale securities Investment in associate (Reclassification) 375,000 5,350,000 5,350,000 No entry is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest Problem 11-10 Requirement a Investment in associate Cash 3,500,000 3,500,000 Investment in associate Investment income (40% x 4,000,000) 1,600,000 1,600,000 Cash (40% x 1,000,000) Investment in associate 400,000 400,000 Investment income Investment in associate (600,000 / 4) 150,000 Cost Book value of interest acquired (40% x 7,000,000) 2,800,000 150,000 3,500,000 Excess of cost over book value Excess attributable to equipment (40% x 1,500,000) Excess attributable to inventory (40% x 500,000) ( 200,000) Excess net fair value over cost Investment income Investment in associate 200,000 Investment in associate Investment income ( 700,000 600,000) ( 100,000) 200,000 100,000 100,000 143 Requirement b Share in net income Amortization of excess attributable to equipment Amortization of excess attributable to inventory Excess net fair value over cost Net investment income 1,600,000 ( 150,000) ( 200,000) 100,000 1,350,000 Problem 11-11 Investment in associate Cash Investment in associate Investment income (40% x 650,000) Cash (40% x 150,000) Investment in associate 60,000 Investment in associate Revaluation surplus – investee (40% x 1,300,000) 1,700,000 1,700,000 260,000 260,000 60,000 520,000 520,000 Note: Cost Interest acquired (40% x 4,000,000) 1,600,000 Goodwill – not amortized 1,700,000 100,000 There is no need to adjust for the difference in depreciation method If both entities a method that best reflects the flow of benefits as the assets are consumed, then there is no policy difference Problem 11-12 Journal entries a Investment in associate Cash 6,000,000 6,000,000 b Investment in associate Investment income 750,000 750,000 c Cash Investment in associate 450,000 d Investment income Investment in associate 200,000 450,000 200,000 144 Share in net income Amortization of patent (2,000,000 / 10) Investment income 550,000 750,000 (200,000) Acquisition cost Share in net income (5,000,000 x 15%) Share in cash dividend (3,000,000 x 15%) ( 450,000) Amortization of patent (2,000,000 / 10) 6,000,000 750,000 ( Carrying value 200,000) 6,100,000 Interest acquired (30,000 / 200,000) 15% Acquisition cost Book value of net assets acquired 4,000,000 Excess of cost applicable to patent 6,000,000 2,000,000 Problem 11-13 Journal entries a Investment in associate Cash 5,000,000 5,000,000 b Investment in associate Investment income 1,200,000 1,200,000 c Cash Investment in associate 300,000 d Investment income Investment in associate 150,000 Share in net income 300,000 150,000 1,200,000 Amortization of depreciable asset (750,000 / 5) ( 150,000) Investment income 1,050,000 Acquisition cost Share in net income (30% x 4,000,000) Share in cash dividend (30% x 1,000,000) ( 300,000) Amortization of depreciable asset (750,000 / 5) 5,000,000 1,200,000 ( 150,000) Carrying value of investment 5,750,000 Acquisition cost Net assets acquired (30% x 12,000,000) Excess of cost Excess attributable to depreciable asset (30% x 2,500,000) Excess attributable to goodwill 5,000,000 3,600,000 1,400,000 750,000 650,000 145 Problem 11-14 Journal entries a Investment in associate Cash 1,000,000 1,000,000 b Investment in associate Investment income 175,000 175,000 c Cash Investment in associate 75,000 d Investment income Investment in associate 50,000 Share in net income Amortization of excess (25,000 + 25,000) ( 50,000) Investment income 125,000 Acquisition cost Net assets acquired (25% x 3,000,000) Excess of cost Excess attributable to inventory (25% x 100,000) 25,000 Excess attributable to equipment (25% x 500,000) 125,000 75,000 50,000 175,000 1,000,000 750,000 250,000 Excess attributable to goodwill (25% x 400,000) 100,000 250,000 Acquisition cost Share in net income (25% x 700,000) Amortization of excess: Inventory Equipment (125,000 / 5) Cash dividend (25,000 x 3) ( 75,000) Investment balance 1,000,000 175,000 ( ( 25,000) 25,000) 1,050,000 Problem 11-15 Share in 2008 net income 900,000 Amortization of excess (400,000 / 20) Investment income for 2008 ( 20,000) 880,000 Acquisition cost (20,000 x 120) Net assets acquired (25% x 8,000,000) Excess of cost 2,400,000 2,000,000 400,000 146 Share in 2008 net income 975,000 Amortization of excess Investment income for 2009 Acquisition cost Share in net income: 2008 (25% x 3,600,000) 900,000 2009 (25% x 3,900,000) 975,000 Share in cash dividend: 2008 (20,000 x 16) 2009 (20,000 x 20) Amortization of excess: 2008 (400,000 / 20) 2009 Investment balance – 12/31/2009 3,515,000 Problem 11-16 Requirement a Memo – Received 500 shares as 10% stock dividend on 5,000 original Dale ordinary shares Shares now held, 5,500 ( 20,000) 955,000 2,400,000 ( 320,000) ( 400,000) ( ( 20,000) 20,000) Cash (5,500 x 20) Dividend income Stock rights (15/150 x 1,600,000) Investment in equity securities – Ever 160,000 Cash Stock rights Gain on sale of stock rights Investment in associate Cash 110,000 160,000 200,000 5,000,000 1/1/2007 Acquisition cost 5,000,000 Net assets acquired: 10% x 16,000,000 20% x 20,000,000 Goodwill 110,000 1,600,000 400,000 Income from Fox investment in 2007 (10% x 4,000,000) 400,000 Less: Dividend income recorded in 2007 – cost method - _ Understatement of income 160,000 40,000 5,000,000 1/1/2008 2,000,000 4,000,000 1,000,000 400,000 147 Investment in associate Investment in equity securities 2,000,000 (Reclassification) 2,000,000 Investment in associate Retained earnings 400,000 Investment in associate Investment income (30% x 6,000,000) 1,800,000 Cash (75,000 x 20) Investment in associate 400,000 1,800,000 1,500,000 1,500,000 Requirement b Noncurrent assets: Investment in equity securities (Note) Investment in associate – Fox Corporation 2,690,000 7,700,000 Note – Investment in equity securities Dale Corporation, 5,500 shares Ever Corporation, 10,000 shares Total cost 1,250,000 1,440,000 2,690,000 Problem 11-17 Answer D Problem 11-18 Answer D Problem 11-19 Answer B Investment in Lax Corporation 3,000,000 Problem 11-20 Answer C Total cash dividend Cumulative net income Liquidating dividend Cash (10% x 3,000,000) Dividend income (10% x 2,500,000) Investment in equity securities 3,000,000 2,500,000 500,000 300,000 250,000 50,000 Problem 11-21 Answer B Investment income (20% x 1,600,000) 320,000 148 Problem 11-22 Answer A Investment income (20% x 6,000,000) 1,200,000 Problem 11-23 Answer C Interest (30,000/100,000) 30% Investment income (5,000,000 x 6/12 x 30%) 750,000 Problem 11-24 Answer C Cost Less: Net assets acquired (40% x 8,000,000) 3,200,000 Excess of cost or goodwill 4,000,000 800,000 Fair value of call option (120 – 100 = 20 x 10,000) 200,000 Problem 14-23 Answer B Exchange rate on July 31 (80,000,000 / 92) Strike price (80,000,000 / 100) 800,000 Derivative asset Call option payment Saving 869,565 69,565 10,000 59,565 Problem 14-24 Question Answer A Camry’s payment to Corolla (5,000,000 x 2%) 100,000 Question Answer C Fair value of interest rate swap (100,000 x 926) 92,600 Problem 14-25 Answer C Notional amount Exchange rate on December 31, 2008 (47,850,000 / 115) Fair value of forward contract receivable 435,000 416,087 18,913 197 CHAPTER 15 Problem 15-1 Problem 15-3 10 D C A D D C A B A C Problem 15-2 10 D C D C C C B C D C A C A A D Problem 15-4 Machinery Cash Land (2/5 x 5,500,000) Building (3/5 x 5,500,000) Cash 500,000 2,200,000 3,300,000 500,000 5,500,000 Investment in equity security Cash 500,000 500,000 600,000 Delivery equipment (5,000 x 120) Investment in equity security 500,000 Gain on exchange 100,000 Taxes and licenses Cash 3,000 Equipment Donated capital 3,000 1,000,000 1,000,000 Donated capital Cash 25,000 Land Building Share capital (60,000 x 100) Share premium 25,000 2,000,000 5,500,000 6,000,000 1,500,000 198 Problem 15-5 Net method Gross method a Within the discount period: Machinery 500,000 Accounts payable 500,000 (500,000 x 98%) Accounts payable Cash a Within the discount period: 490,000 490,000 490,000 490,000 b Beyond the discount period: Machinery Accounts payable 2008 Accounts Accounts payable Cash Machinery payable 500,000 490,000 10,000 b Beyond the discount period: 490,000 490,000 Accounts payable 490,000 Purchase discount lost 10,000 Cash 500,000 Problem 15-6 Machinery Machinery Accounts payable 500,000 500,000 Accounts payable 500,000 Purchase discount lost 10,000 Cash Machinery 500,000 10,000 Jan Equipment Discount on note payable Cash Note payable 580,000 120,000 Dec 31 Note payable Cash 100,000 31 Interest expense Discount on note payable 2008 2009 2010 2011 2012 2009 Dec 31 31 Note payable 500,000 400,000 300,000 200,000 100,000 1,500,000 200,000 500,000 100,000 40,000 40,000 5/15 4/15 3/15 2/15 1/15 Fraction Amortization 40,000 32,000 24,000 16,000 8,000 120,000 Note payable Cash 100,000 100,000 Interest expense Discount on note payable 32,000 32,000 199 Problem 15-7 Down payment Present value of note (200,000 x 3.17) 634,000 Total cost 2008 Jan 100,000 734,000 Machinery Discount on note payable Cash Note payable 734,000 166,000 100,000 800,000 Dec 31 Note payable Cash 200,000 200,000 31 Interest expense Discount on note payable Date value 01/01/2008 12/31/2008 12/31/2009 12/31/2010 Payment 200,000 200,000 200,000 63,400 10% interest 63,400 49,740 34,714 Principal 136,600 150,260 165,286 63,400 Present 634,000 497,400 347,140 181,854 12/31/2011 200,000 2009 Dec 31 Note payable Cash 31 Interest expense Discount on note payable 18,146 181,854 - 200,000 200,000 49,740 49,740 Problem 15-8 Building Cash Share capital Share premium 1,000,000 Land Income from donation 1,500,000 Machinery (800,000 x 95%) Cash Equipment Note payable 7,000,000 1,000,000 5,000,000 1,500,000 760,000 760,000 200,000 200,000 200 Problem 15-9 Land (1/4 x 6,000,000) Building (3/4 x 6,000,000) Machinery (8/12 x 1,800,000) Office equipment (4/12 x 1,800,000) Delivery equipment Cash 1,500,000 4,500,000 1,200,000 600,000 500,000 8,300,000 Land Building Machinery Share capital Share premium 1,000,000 5,000,000 2,000,000 6,000,000 2,000,000 Land Donated capital 500,000 500,000 Machinery (900,000 x 98%) Cash 882,000 882,000 Machinery Cash Furniture and fixtures (400,000 x 797) Discount on note payable 35,000 35,000 318,800 81,200 Note payable 400,000 Problem 15-10 Land Accumulated depreciation Equipment – old Gain on exchange 700,000 1,500,000 2,000,000 200,000 Fair value of equipment given Less: Book value Gain on exchange 1,500,000 1,300,000 200,000 Equipment - new Accumulated depreciation Equipment – old 1,300,000 700,000 Equipment - new Accumulated depreciation Equipment – old Cash Gain on exchange 2,000,000 700,000 2,000,000 2,000,000 500,000 200,000 201 Fair value Cash payment Cost of new asset 1,500,000 500,000 2,000,000 Fair value Less: Book value Gain on exchange 1,500,000 1,300,000 200,000 Problem 15-11 Computer Inventory (car) 300,000 Cash Gain on exchange Machinery – new (110,000 + 30,000) Accumulated depreciation Loss on exchange Machinery – old 240,000 Cash Fair value of asset given Book value Loss on exchange 430,000 50,000 80,000 140,000 120,000 10,000 30,000 110,000 120,000 ( 10,000) Problem 15-12 ABC XYZ Equipment - new 500,000 Equipment – new 500,000 Accumulated depreciation 2,000,000 Accumulated depreciation 1,750,000 Equipment – old 2,400,000 Equipment – old 2,200,000 Gain on exchange 100,000 Gain on exchange 50,000 Problem 15-13 Equipment – new Loss on exchange Accumulated depreciation Equipment – old 3,000,000 1,000,000 200,000 1,800,000 Problem 15-14 Company A Machinery – new (600,000 + 200,000) Accumulated depreciation Machinery – old Cash Gain on exchange (600,000 – 500,000) 100,000 800,000 1,500,000 2,000,000 200,000 202 Company B Machinery – new (800,000 - 200,000) Accumulated depreciation Cash Machinery – old Gain on exchange (800,000 – 700,000) 100,000 600,000 1,800,000 200,000 2,500,000 Problem 15-15 Equipment - new Accumulated depreciation Loss on exchange Equipment – old 1,200,000 Cash 1,400,000 1,050,000 50,000 1,300,000 Fair value Cash payment (1,600,000 – 300,000) 1,300,000 Cost of new asset 100,000 1,400,000 Fair value Less: Book value 100,000 ( 150,000) Loss on exchange ( 50,000) Problem 15-16 Cash price without trade in Cash payment Trade in value Less: Book value Gain on exchange 1,400,000 980,000 420,000 400,000 20,000 Equipment - new Accumulated depreciation Equipment – old 1,000,000 Cash Gain on exchange 1,400,000 600,000 980,000 20,000 Problem 15-17 Delivery equipment - new Accumulated depreciation Loss on exchange Input tax Insurance Taxes and licenses Delivery equipment – old Cash 2,300,000 1,300,000 150,000 300,000 120,000 10,000 1,500,000 2,680,000 203 Fair value of asset given Cash paid Total Less: VAT Insurance Registration fee Cost of new asset 50,000 2,680,000 2,730,000 300,000 120,000 10,000 Fair value Book value Loss on exchange 430,000 2,300,000 50,000 200,000 (150,000) Problem 15-18 Total Building Direct labor Materials Overhead Direct labor Materials Finished goods 6,000,000 7,000,000 2,000,000 15,000,000 4,200,000 3,000,000 2,000,000 9,200,000 1,800,000 4,000,000 - _ 5,800,000 6,000,000 7,000,000 4,200,000 3,000,000 1,800,000 4,000,000 Overhead 135 / 180 x 2,000,000 45 / 180 x 2,000,000 500,000 6,300,000 2,000,000 Direct labor Materials Overhead 42 / 60 x 2,000,000 18 / 60 x 2,000,000 600,000 6,400,000 6,000,000 7,000,000 2,000,000 1,500,000 _ _ 15,000,000 8,700,000 4,200,000 3,000,000 _ 15,000,000 1,800,000 4,000,000 1,400,000 _ 8,600,000 Problem 15-19 a Materials Direct labor Overhead Cost of machinery 500,000 1,000,000 600,000 2,100,000 Overhead Charged to finished goods (75% x 4,000,000) Charged to machinery 3,600,000 3,000,000 600,000 b Materials Direct labor Overhead (1/5 x 3,600,000) Cost of machinery 500,000 1,000,000 720,000 2,220,000 204 Direct labor: Finished goods 4/5 Machinery 4,000,000 1,000,000 5,000,000 1/5 Problem 15-20 Date January June 30 December 31 Expenditure Months 2,000,000 2,000,000 1,000,000 5,000,000 12 Average expenditures (36,000,000 x 12) Amount 24,000,000 12,000,000 - 36,000,000 3,000,000 Average capitalization rate (1,060,000 / 8,000,000) 13.25% Expenditures on building 5,000,000 Interest (3,000,000 x 13.25%) 397,500 Total cost of building 5,397,500 Problem 15-21 Average capitalization rate (900,000 / 8,000,000) Date 11.25% Expenditure Months 2,000,000 1,000,000 3,000,000 6,000,000 12 January March 31 September 30 Amount 24,000,000 9,000,000 9,000,000 42,000,000 Average expenditures (42,000,000 / 12) 3,500,000 Expenditures on construction 6,000,000 Specific interest cost: Actual interest Interest income General interest cost: Average expenditures Less: Specific borrowing General borrowing Capitalization rate 168,750 Total cost of building 240,000 ( 10,000) 3,500,000 2,000,000 1,500,000 230,000 11.25% 6,398,750 205 Problem 15-22 Date January March 31 June 30 September 30 December 31 Expenditure 1,500,000 1,000,000 1,000,000 1,000,000 1,000,000 5,500,000 Months 12 Amount 18,000,000 9,000,000 6,000,000 3,000,000 - _ 36,000,000 Average expenditures (36,000,000 x 12) 3,000,000 Expenditures on construction 5,500,000 Interest cost (3,000,000 x 11.5%) Total cost 345,000 5,845,000 Problem 15-23 Date January July November Expenditure 1,000,000 2,000,000 3,000,000 6,000,000 Months 12 Amount 12,000,000 12,000,000 6,000,000 30,000,000 Average expenditures (30,000,000 / 12) 2,500,000 Average expenditures 2,500,000 Applicable to specific loan Applicable t general loan (1,000,000) 1,500,000 Actual expenditures Capitalizable interest: Specific (1,000,000 x 10%) General (1,500,000 x 12%) Total cost of building 6,000,000 100,000 180,000 6,280,000 Problem 15-24 Date January 1, 2008 April 1, 2008 December 1, 2008 Average expenditures 8,000,000 Applicable to specific loan Applicable t general loan Expenditure 4,000,000 5,000,000 3,000,000 12,000,000 Months 12 Amount 48,000,000 45,000,000 3,000,000 96,000,000 in 2008 (96,000,000 / 12) (3,000,000) 5,000,000 206 Actual expenditures in 2008 12,000,000 Capitalizable interest in 2008 Specific (3,000,000 x 10%) General (5,000,000 x 12%) Total cost of building Date January 1, 2009 March 1, 2009 Average expenditures 16,900,000 Applicable to specific loan Applicable to general loan Expenditure 12,900,000 6,000,000 18,900,000 300,000 600,000 12,900,000 Months Amount 77,400,000 _24,000,000 101,400,000 in 2009 (101,400,000 / 6) ( 3,000,000) 13,900,000 Note that the construction period in 2009 is only months because the building was completed on June 30, 2009 Thus, the average expenditures should be for months only Actual expenditures in 2009 18,900,000 Capitalizable interest in 2009 Specific (3,000,000 x 10% x 6/12) 150,000 General (13,900,000 x 12% x 6/12) Total cost of new building – 6/30/2009 834,000 19,884,000 Problem 15-25 Cash Deferred income-government grant Environmental expenses Cash 30,000,000 30,000,000 2,000,000 2,000,000 Deferred income-government grant 3,000,000 Income from government grant (2/20 x 30,000,000) 3,000,000 Cash Deferred income-government grant Building Cash Depreciation Accumulated depreciation (50,000,000 / 20) 2,500,000 Deferred income-government grant Income from government grant (40,000,000 / 20) 40,000,000 40,000,000 50,000,000 50,000,000 2,500,000 2,000,000 2,000,000 207 Land Deferred income-government grant Building Cash Depreciation Accumulated depreciation (80,000,000 / 25) 3,200,000 Deferred income-government grant Income from government grant (50,000,000 / 25) 50,000,000 50,000,000 80,000,000 80,000,000 3,200,000 2,000,000 2,000,000 Cash Income from government grant 10,000,000 10,000,000 Problem 15-26 Answer D Cost of land (5,400,000 x 2/5) 2,160,000 Problem 15-27 Answer B Cash price Installation cost Total cost 950,000 30,000 980,000 Problem 15-28 Answer C Cash price Installation cost Total cost 2,000,000 50,000 2,050,000 Present value of first note payable (500,000 x 5.65) 2,825,000 Present value of second note payable (3,000,000 x 80) Total cost of machinery 2,400,000 5,225,000 Problem 15-29 Answer B Problem 15-30 Answer D First payment on December 30, 2008 200,000 Present value of next payments (200,000 x 4.712) 942,400 Total cost of machine 1,142,400 Another computation: PV of annuity of in advance for periods (200,000 x 5.712) 1,142,400 208 Problem 15-31 Answer A Invoice price 700,000 Discount (2% x 700,000) ( 14,000) Freight and insurance 3,000 Cost of assembling and installation Total cost 5,000 694,000 Problem 15-32 Answer A Equipment: Invoice price Discount (5% x 600,000) 570,000 Land (at its fair value) 1,100,000 Machinery: Acquisition cost Installation cost Trial run and testing cost Construction of base Total 600,000 ( 275,000 7,000 18,000 10,000 30,000) 310,000 1,980,000 Problem 15-33 Answer B Fair value of asset given Cash payment Total cost 700,000 160,000 860,000 Problem 15-34 Answer B Fair value of asset given Cash payment Cost of new inventory 2,500,000 2,100,000 400,000 Fair value of asset given Less: Cost of asset given Gain on exchange 1,500,000 1,250,000 250,000 Problem 15-35 Answer A Problem 15-36 Answer A Since the old machine has no available fair value, the new machine received in exchange is recorded at its cash price without trade in of P900,000 The average published retail value of the old machine is not necessarily its fair value 209 Problem 15-37 Answer A Average expenditures (20,000,000 / 2) Multiply y capitalization rate Interest on average expenditures 10,000,000 12% 1,200,000 The capitalizable borrowing cost is limited to the actual borrowing cost incurred In this case, the computed amount of P1,200,000 is more than the actual borrowing cost of P1,020,000 Accordingly, the capitalizable interest is P1,020,000 Note that in computing the average expenditures, the amount of P20,000,000 is simply divided by because the said amount is incurred evenly during the year ended 2008 Problem 15-38 Answer C Since the actual interest incurred is not given, the interest on the average expenditures is determined Average expenditures (9,600,000 / 2) 4,800,000 Interest on average expenditures (4,800,000 x 10%) 480,000 Interest income on unexpended portion (320,000) Capitalizable interest 160,000 Problem 15-39 Answer B Accumulated expenditures at the end of two years 3,000,000 Average expenditures in the third year (8,000,000 / 2) Total Capitalizable interest (7,000,000 x 9%) 4,000,000 7,000,000 630,000 Problem 15-40 Answer B Average accumulated expenditures Specific borrowing Applicable to general borrowing Specific (6% x 1,500,000) General (9% x 1,000,000) Capitalizable interest 2,500,000 (1,500,000) 1,000,000 90,000 90,000 180,000 ... is required for the share in net income because the investor is now using the fair value method by reason on the reduced 15% interest Problem 11-10 Requirement a Investment in associate Cash 3,500,000... interest (5,000,000 x 4%) 200,000 Semiannual effective interest (5,000,000 x 5%) Difference Multiply by present value of annuity of for 20 periods at 5% Discount Face value Discount Purchase price... x 16%) 640,000 Annual effective interest (4,000,000 x 12%) 480,000 Difference 160,000 Multiply by present value factor Premium Face value Purchase price 3.605 576,800 4,000,000 4,576,800 165