The following information pertains to equipment constructed by a firm for its own use.The construction is finished. $$\begin{array} {| l | l | }
\hline \text { Materials used in construction } & \$ 40,000 \
\hline \text { Labour cost during construction } & 20,000 \
\hline \text { Fringe benefits on above labour } & 5,000 \
\hline \text { Incremental overhead due to Construction } & 8,000 \
\hline \begin{array} { l }
\text { Interest expense on debt during Construction (assume this meets the requirements for } \
\text { interest capitalization) }
\end{array} & 4,000 \
\hline
\end{array}$$ The market value of the equipment immediately after construction was completed was $65,000.What is the loss on construction incurred by the firm?

Question

The following information pertains to equipment constructed by a firm for its own use.The construction is finished. $$\begin{array} {| l | l | } 
\hline \text { Materials used in construction } & \$ 40,000 \
\hline \text { Labour cost during construction } & 20,000 \
\hline \text { Fringe benefits on above labour } & 5,000 \
\hline \text { Incremental overhead due to Construction } & 8,000 \
\hline \begin{array} { l } 
\text { Interest expense on debt during Construction (assume this meets the requirements for } \
\text { interest capitalization) }
\end{array} & 4,000 \
\hline
\end{array}$$ The market value of the equipment immediately after construction was completed was $65,000.What is the loss on construction incurred by the firm?

Quizplus · Accepted Answer

The loss on construction incurred by the firm can be calculated as follows:

Total cost of construction = Materials + Labour + Fringe benefits + Incremental overhead + Interest expense 
= $40,000 + $20,000 + $5,000 + $8,000 + $4,000 
= $77,000

Since the market value of the equipment immediately after construction was $65,000, the loss incurred by the firm is:

Loss on construction = Total cost of construction - Market value after construction 
= $77,000 - $65,000 
= $12,000

Therefore, the correct answer is B) $12,000.

The Following Information Pertains to Equipment Constructed by a Firm