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Chapter 9: Q7TI (page 519)

Arca Salvage, Inc. purchased equipment for \(10,000. Arca recorded total depreciation of \)8,000 on the equipment. Assume that Arca exchanged the old equipment for new equipment, paying \(4,000 cash. The fair market value of the new equipment is \)5,000. Journalize Arca’s exchange of equipment. Assume this exchange has commercial substance.

Short Answer

Expert verified

Equipment (new), Accumulated depreciation, and loss on disposal are debited by $5,000, $8,000, and $1,000, respectively, and new Equipment and cash are credited by $10,000 and $4,000, respectively.

Step by step solution

01

Meaning of Commercial Substance

Commercial substance refers tothose business transactions that will affect the future outflows of the business.

02

Showing Journal Entry

Date

Accounts

Debit ($)

Credit ($)

Equipment(new)

5,000


Accumulated depreciation-Equipment

8,000

Loss on Disposal

1,000

Equipment(old)


10,000

Cash

4,000


Working note:

Market value of assets received

$5,000

Less:

Book value of asset exchanged ($10,000 - $8000) = $2,000

Cash paid 4,000

6,000

Gain or (Loss)

($1000)

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Most popular questions from this chapter

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company,which had the following figures:

Book value of assets \( 700,000

Market value of assets 1,000,000

Market value of liabilities 510,000

Requirements

1. Journalize the entry to record Core’s purchase of Surety Wireless for \)280,000 cashplus a $420,000 note payable.

2. What special asset does Core’s acquisition of Surety Wireless identify? How shouldCore Telecom account for this asset after acquiring Surety Wireless? Explain in detail

How do land improvements differ from land?

Counselors of Atlanta purchased equipment on January 1, 2017, for \(20,000. Counselors of Atlanta expected the equipment to last for four years and have a residual value of \)2,000. Suppose Counselors of Atlanta sold the equipment for $8,000 on December 31, 2019, after using the equipment for three full years. Assume depreciation for 2019 has been recorded. Journalize the sale of the equipment, assuming straight-line depreciation was used.

What is the difference between capital expenditure and a revenue expenditure? Give an example of each.

Determining asset cost and recording partial-year depreciation, straight-line Discount Parking, near an airport, incurred the following costs to acquire land, make land improvements, and construct and furnish a small building:

a. Purchase price of three acres of land $ 80,000

b. Delinquent real estate taxes on the land to be paid by Discount Parking 6,300

c. Additional dirt and earthmoving 9,000

d. Title insurance on the land acquisition 3,200

e. Fence around the boundary of the property 9,600

f. Building permits for the building 1,000

g. Architect’s fee for the design of the building 20,700

h. Signs near the front of the property 9,300

i. Materials used to construct the building 215,000

j. Labor to construct the building 175,000

k. Interest cost on the construction loan for the building 9,400

l. Parking lots on the property 28,500

m. Lights for the parking lots 11,200

n. Salary of construction supervisor (80% to building; 20% to parking lot and concrete walks) 50,000

o. Furniture 11,200

p. Transportation of furniture from seller to the building 2,200

q. Additional fencing 6,600

Discount Parking depreciates land improvements over 15 years, buildings over 40 years, and furniture over 10 years, all on a straight-line basis with zero residual value’s

Requirements

1. Set up columns for Land, Land Improvements, Building, and Furniture. Show how to account for each cost by listing the cost under the correct account. Determine the total cost of each asset.

2. All construction was complete and the assets were placed in service on October 1. Record partial-year depreciation expense for the year ended December 31. Round to the nearest dollar
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