Laserwords Inc. is a book distributor that had been operating in its original fa
ID: 2444515 • Letter: L
Question
Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2009. Laserwords’ original facility became obsolete by early 2014 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.
On June 1, 2014, Laserwords contracted with Black Construction to have a new building constructed for $5,464,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.
Date
Amount
$1,229,400
2,049,000
2,185,600
$5,464,000
Construction was completed and the building was ready for occupancy on May 27, 2015. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2015, the end of its fiscal year.
8%, 5-year note payable of $2,732,000, dated April 1, 2011, with interest payable annually on April 1.
10%, 10-year bond issue of $4,098,000 sold at par on June 30, 2007, 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.
1. Compute the weighted-average accumulated expenditures on Laserwords’ new building during the capitalization period. (Round answer to 0 decimal places, e.g 5,275.)
2. Compute the avoidable interest on Laserwords’ new building.
3. Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2015. Compute the amount of each items that must be disclosed in Laserwords’ financial statements.
Date
Amount
July 30, 2014$1,229,400
January 30, 20152,049,000
May 30, 20152,185,600
Total payments$5,464,000
Explanation / Answer
Answer: there are two methods to display net cash flows from operating activities: the direct method and the indirect method. Under the indirect method, the basic approach is to adjust net income to arrive at net cash flows from operating activities. This indirect method involves listing changes in working capital accounts (by comparing the opening and ending balances). The direct method lists all cash revenues and expenses directly. Changes in balance sheet accounts are not involved in this method. Both methods report the same net operating cash flow, the only difference is in presentation.
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