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Chapter 10: Q03E (page 533)

(Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below.

  1. Truck #1 has a list price of \(15,000 and is acquired for a cash payment of \)13,900.
  2. Truck #2 has a list price of \(16,000 and is acquired for a down payment of \)2,000 cash and a zero-interest-bearing note with a face amount of \(14,000. The note is due April 1, 2018. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
  3. Truck #3 has a list price of \)16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost \(12,000 and is normally sold by Clarkson for \)15,200. Clarkson uses a perpetual inventory system.
  4. Truck #4 has a list price of \(14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of \)10 and a market price of $13 per share.

Instructions

Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.

Short Answer

Expert verified

Answer

1) Value of Trucks = $13,900

2) Value of Trucks = $14,727.26

3) Value of Trucks = $15,200

4) Common Stock = $3,000

Step by step solution

01

Meaning of Acquisition Cost

In accounting terms,acquisition cost alludes to the cost of acquiring a particular thing. There are three common business contexts when this term is used: mergers and acquisitions, fixed resources, and client acquisition.

02

 Step 2: (1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Trucks

13,9000.00

Cash

13,900.00





03

(2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Trucks

14,727,26

Discount on Notes Payable

Cash

1,272.74

2,000.00

Notes Payable



Working Notes:

For calculating the value of truck, the present value should be ascertained first.

Calculation of Present Value for Year 1

Presentvalue=FaceValue×PVFactor=$14,000×0,90909=$12,727.26

Calculation of value of trucks

TruckValue=PresentValue+DownPayment=$12,727.26+$2,000=$14,727.26

04

(3) Preparing journal entries

Date

Particulars

Debit ($)

Credit($)

Trucks

15,2000.00

Cost of Good Sold

12,000.00

Inventory

12,000.00

Sales Revenue

15,200.00

Note: The selling (retail) price of the computer system appears to be a better measure of the fair worth of the consideration received than the list price of the vehicle (truck). Vehicles are frequently offered for less than the stated price.

05

(4) Preparing journal entries

Date

Particulars

Debit ($)($)

Credit ($)

Trucks

13,000.00

Common Stock

10,000.00

Paid-in Capital in Excess of Par

Common Stock

3,000.00

Working notes:

Calculation of common stock

CommonStock=Shares×PerShareValue=1,000×$13=$13,000

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Most popular questions from this chapter

(Nonmonetary Exchange) Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of \(8,000 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid \)8,000 cash and traded in used equipment. The used equipment had originally cost \(62,000; it had a book value of \)42,000 and a secondhand fair value of \(47,800, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of \)1,100.

Instructions

  1. Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
  2. Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable, prepare the general journal entry to record this transaction.

Question: When should debt security be classified as held-to-maturity?

Question: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

(Classification of Acquisition Costs) Selected accounts included in the property, plant, and equipment section of Lobo Corporation’s balance sheet at December 31, 2016, had the following balances.

Land

\( 300,000

Land improvements

140,000

Buildings

1,100,000

Equipment

960,000

During 2017, the following transactions occurred.

  1. A tract of land was acquired for \)150,000 as a potential future building site.
  2. A plant facility consisting of land and building was acquired from Mendota Company in exchange for 20,000 shares of Lobo’s common stock. On the acquisition date, Lobo’s stock had a closing market price of \(37 per share on a national stock exchange. The plant facility was carried on Mendota’s books at \)110,000 for land and \(320,000 for the building at the exchange date. Current appraised values for the land and building, respectively, are \)230,000 and \(690,000.
  3. Items of machinery and equipment were purchased at a total cost of \)400,000. Additional costs were incurred as follows.

Freight and unloading

\(13,000

Sales taxes

20,000

Installation

26,000

  1. Expenditures totaling \)95,000 were made for new parking lots, streets, and sidewalks at the corporation’s various plant locations. These expenditures had an estimated useful life of 15 years.
  2. A machine costing \(80,000 on January 1, 2009, was scrapped on June 30, 2017. Double-declining-balance depreciation has been recorded on the basis of a 10-year life.
  3. A machine was sold for \)20,000 on July 1, 2017. Original cost of the machine was \(44,000 on January 1, 2014, and it was depreciated on the straight-line basis over an estimated useful life of 7 years and a salvage value of \)2,000.

Instructions

(Round to the nearest dollar.)

a. Prepare a detailed analysis of the changes in each of the following balance sheet accounts for 2017.

Land Buildings

Land Improvements Equipment

(Hint: Disregard the related accumulated depreciation accounts.)

b. List the items in the fact situation that were not used to determine the answer to (a), showing the pertinent amounts and supporting computations in good form for each item. In addition, indicate where, or if, these items should be included in Lobo’s financial statements.
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