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Professional CPA simulation

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Using Your Judgment603

Principles

How does the concept of commercial substance affect the accounting and analysis of this exchange?

BRIDGE TO THE PROFESSION

Professional Research: FASB Codification

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions

If your school has a subscription to the FASB Codification, go tohttp://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.

(b) What are the objectives for capitalizing interest?

(c) Discuss which assets qualify for interest capitalization.

(d) Is there a limit to the amount of interest that may be capitalized in a period?

(e) If interest capitalization is allowed, what disclosures are required?

Professional Simulation

In this simulation, you are asked to address questions regarding the accounting for property, plant, and equipment. Prepare responses to all parts.

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Property, Plant, and Equipment

Time Remaining

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Norwel Company manufactures miniature circuit boards used in wireless phones and personal organizers. On January 2, 2012, Norwel purchased a circuit board stamping machine at a retail price of $12,000. Norwel paid 5% sales tax on this purchase. Norwel paid a contractor $1,400 for a specially wired platform for the machine, to ensure non-interrupted power to the machine. Norwel estimates the machine will have a 4-year useful life, with a residual value of $2,000 at the end of 4 years. Norwel uses straight-line depreciation and employs the half-year convention in accounting for partial-year depreciation (that is, it takes a half year of depreciation in the first year of an asset’s useful life). Norwel’s fiscal year ends on December 31.

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At what amount should Norwel record the acquisition cost of the machine?

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What journal entry should Norwel record in 2012?

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At what amount will the machine be reported in Norwel’s balance sheet at December 31, 2012?

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On July 1, 2013, Norwel decides to outsource its circuit board operations to Boards-R-Us Inc. As part of this plan, Norwel sells the machine (and the platform) to Boards-R-Us for $7,000. What is the impact of this disposal on Norwel’s 2013 income before taxes?

Remember to check the book’s companion website to find additional resources for this chapter.

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