P10-7B (LO4) (Capitalization of Interest) Phipps Inc. is a large scale bakery that had been operating in its original facilitysince 1960. The increase in designer cakes and the popularity of cooking shows on cable has contributed to an annual growthrate of 15% for Phipps since 2013. Phipps' original facility became obsolete by early 2017 because of the increased sales volumeand the fact that Phipps markets their bakery products world-wide.On July 1, 2017, Phipps contracted with Cakes Construction to have a new bakery constructed for $2,000,000 on land ownedby Phipps. The payments made by Phipps to Cakes Construction are shown in the schedule below.DateAmountAugust 1, 2017November 30, 2017April 30, 2018Total payments$ 500,000840,000660,000$2,000,000Construction was completed and the building was ready for occupancy on April 29, 2018. Phipps had no new borrowingsdirectly associated with the new building but had the following debt outstanding at April 30, 2018, the end of its fiscal year.8%, 10-year note payable of $1,000,000, dated January 1, 2014, with interest payable annually on December 31.6%, 20-year bond issue of $2,000,000 sold at par on July 1, 2003, with interest payable annually on June 30.The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, comparedwith the effect of expensing the interest, is material.Instructions(a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period.(b) Compute the avoidable interest on Phipps' new building.(c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018.(1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements.(2) Compute the amount of each of the items that must be disclosed.(CMA adapted)

Name: P10-7B (LO4) (Capitalization of Interest) Phipps Inc. is a large scal
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Description: P10-7B (LO4) (Capitalization of Interest) Phipps Inc. is a large scale bakery that had been operating in its original facilitysince 1960. The increase in designer cakes and the popularity of cooking shows on cable has contributed to an annual growth

Weighted average accumulated expenditure qualifying for capitalisation of interest cost: Date…

Business

Accounting

(a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period. (b) Compute the avoidable interest on Phipps' new building. (c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018. (1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements. (2) Compute the amount of each of the items that must be disclosed.

(a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period. (b) Compute the avoidable interest on Phipps' new building. (c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018. (1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements. (2) Compute the amount of each of the items that must be disclosed.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.

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Question

P10-7B (LO4) (Capitalization of Interest) Phipps Inc. is a large scale bakery that had been operating in its original facility
since 1960. The increase in designer cakes and the popularity of cooking shows on cable has contributed to an annual growth
rate of 15% for Phipps since 2013. Phipps' original facility became obsolete by early 2017 because of the increased sales volume
and the fact that Phipps markets their bakery products world-wide.
On July 1, 2017, Phipps contracted with Cakes Construction to have a new bakery constructed for $2,000,000 on land owned
by Phipps. The payments made by Phipps to Cakes Construction are shown in the schedule below.
Date
Amount
August 1, 2017
November 30, 2017
April 30, 2018
Total payments
$ 500,000
840,000
660,000
$2,000,000
Construction was completed and the building was ready for occupancy on April 29, 2018. Phipps had no new borrowings
directly associated with the new building but had the following debt outstanding at April 30, 2018, the end of its fiscal year.
8%, 10-year note payable of $1,000,000, dated January 1, 2014, with interest payable annually on December 31.
6%, 20-year bond issue of $2,000,000 sold at par on July 1, 2003, with interest payable annually on June 30.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared
with the effect of expensing the interest, is material.
Instructions
(a) Compute the weighted-average accumulated expenditures on Phipps' new building during the capitalization period.
(b) Compute the avoidable interest on Phipps' new building.
(c) Some interest cost of Phipps Inc. is capitalized for the year ended April 30, 2018.
(1) Identify the items relating to interest costs that must be disclosed in Phipps' financial statements.
(2) Compute the amount of each of the items that must be disclosed.
(CMA adapted)

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(a) What is the weighted average of accumulated expenditures? (b) What is the avoidable interest for the building in 2018?