WK1 CP

Hank Construction Company is building a hotel for speculative purposes. Hank Company has not found a buyer for the hotel, but expects to do so within a few months. Hank Construction Company expects to spend about another two years to complete construction of the hotel. Hank would like to know if interest and property taxes associated with construction should be capitalized or expensed. In addition, what interest rate, if any, should be used to capitalize interest costs?

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Case 2

As of January 1st, Landon Company owes First Bank $400,000 which is due on December 31st. Since Landon Company seems unable to repay the note, the bank agreed that Landon can settle this balance by agreeing to make four annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note. Specifically, the lender will “do its best” not to call the note, provided that no adverse significant shift occurs in business operations. However, First Bank has the sole discretion to ascertain if adverse conditions arose, and then to call the note due immediately. How should Landon Company account for this situation?

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Case 3

Helen Company’s fiscal year ends on June 30th. Its employees (with at least three months of experience) are entitled to 12 paid sick days annually for each calendar year beginning on January 1st. An employee not taking his or her earned sick days would receive payment thereon on December 31st of that year. How should Helen Company record and measure such a liability as of June 30th?

1

Hank Construction Company is building a hotel for speculative purposes. Hank Company has not found a buyer for the hotel, but expects to do so within a few months. Hank Construction Company expects to spend about another two years to complete construction of the hotel. Hank would like to know if interest and property taxes associated with construction should be capitalized or expensed. In addition, what interest rate, if any, should be used to capitalize interest costs?

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Case 2

As of January 1st, Landon Company owes First Bank $400,000 which is due on December 31st. Since Landon Company seems unable to repay the note, the bank agreed that Landon can settle this balance by agreeing to make four annual installments on each of the next four years, provided that it adds a “due on demand” clause to the note. Specifically, the lender will “do its best” not to call the note, provided that no adverse significant shift occurs in business operations. However, First Bank has the sole discretion to ascertain if adverse conditions arose, and then to call the note due immediately. How should Landon Company account for this situation?

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Case 3

Helen Company’s fiscal year ends on June 30th. Its employees (with at least three months of experience) are entitled to 12 paid sick days annually for each calendar year beginning on January 1st. An employee not taking his or her earned sick days would receive payment thereon on December 31st of that year. How should Helen Company record and measure such a liability as of June 30th?

1