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Chapter 10: Q06E (page 504)

  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres’s assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

350,000

Equipment

300,000

300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

  1. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

  1. Kim Company purchased office equipment for \)20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

  1. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.
  2. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

Short Answer

Expert verified

Answer

  1. The total value of land, building, and equipment are $700,000.
  2. Notes payable are $23,000
  3. Accounts payable are $19,600
  4. Contribution revenue is $27,000
  5. Cash is $600,000

Step by step solution

01

Meaning of Acquisition CostStep 1: 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

(1) Preparing journal entry

Land=TotalcostofAsset×AppraisalValuesTotalAppraisalValues=700,000×150,000800,000=131,250Date

Particulars

Debit ($)

Credit ($)

Land

131,250

Buildings

306,250

Equipment

262,500

Cash

700,000

Working notes:

Calculation of land

Land=TotalcostofAsset×AppraisalValuesTotalApprisalValues=700,000×150,000800,000=131,250

Land=TotalcostofAsset×AppraisalValuesTotalAppraisalValues=700,000×150,000800,000=131,250

Land=TotalcostofAsset×AppraisalValuesTotalAppraisalValues=700,000×150,000800,000=131,250

Calculation of building





Building=Totalcostofasset×AppraisalvaluesTotalAppraisalvalues=700,000×350,000800,000=306,250

Building=TotalcostofAsset×AppraisalValuesTotalAppraisalValues=700,000×350,000800,000=306,250

Calculation of equipment

width="428">Equipment=Totalcostofasset×AppraisalValuesTotalAppraisalValues=700,000×300,000800,000=262,500

Land=TotalcostofAsset×AppraisalValuesTotalApprisalValues=700,000×150,000800,000=131,250

03

(2) Preparing journal entry

Particulars

Debit ($)

Credit ($)

Equipment

25,000

Cash

2,000

Notes Payable

23,000

04

(3) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Equipment

19,600

Accounts Payable

19,600

Working notes:

Calculation of accounts payable

Accountpayable=Equipmentcost-Equipmentcost×Rateofperiod=20,000-20,000-2%=20,000-400=19,600

AccountPayable=Equipmentcost-Equipmentcost×Rateofperiod=20,000-20,000-2%=20,000-400=19,600

05

(4) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Land

27,000

Contribution Revenue

27,000

06

(5) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Buildings

600,000

Cash

600,000

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Most popular questions from this chapter

Mehta Company traded a used welding machine (cost \(9,000, accumulated depreciation \)3,000) for office equipment with an estimated fair value of \(5,000. Mehta also paid \)3,000 cash in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson’s weighted-average accumulated expenditures for interest capitalization purposes.

(Entries for Acquisition of Assets) Presented below is information related to Zonker Company.

1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:

Land

\( 400,000

Buildings

1,200,000

Equipment

800,000

Total

\)2,400,000

Zonker Company gave 12,500 shares of its \(100 par value common stock in exchange. The stock had a market price of \)168 per share on the date of the purchase of the property.

2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building.

Repairs to building

\(105,000

Construction of bases for equipment to be installed later

135,000

Driveways and parking lots

122,000

Remodeling of office space in building, including new partitions and walls

161,000

Special assessment by city on land

18,000

3. On December 20, the company paid cash for equipment, \)260,000, subject to a 2% cash discount, and freight on equipment of $10,500.

Instructions

Prepare entries on the books of Zonker Company for these transactions.

Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.

Question: (Classification of Acquisition and Other Asset Costs) At December 31, 2016, certain accounts included in the property, plant, and equipment section of Reagan Company’s balance sheet had the following balances.

Land

\(230,000

Buildings

890,000

Leasehold improvements

660,000

Equipment

875,000

During 2017, the following transactions occurred.

  1. Land site number 621 was acquired for \)850,000. In addition, to acquire the land Reagan paid a \(51,000 commission to a real estate agent. Costs of \)35,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for \(13,000.
  2. A second tract of land (site number 622) with a building was acquired for \)420,000. The closing statement indicated that the land value was \(300,000 and the building value was \)120,000. Shortly after acquisition, the building was demolished at a cost of \(41,000. A new building was constructed for \)330,000 plus the following costs.

Excavation fees

\(38,000

Architectural design fees

11,000

Building permit fee

2,500

Imputed interest on funds used

during construction (stock financing)

8,500

The building was completed and occupied on September 30, 2017.

  1. A third tract of land (site number 623) was acquired for \)650,000 and was put on the market for resale.
  2. During December 2017, costs of \(89,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2019, and is not expected to be renewed. (Hint: Leasehold improvements should be handled in the same manner as land improvements.)
  3. A group of new machines was purchased under a royalty agreement that provides for payment of royalties based on units of production for the machines. The invoice price of the machines was \)87,000, freight costs were \(3,300, installation costs were \)2,400, and royalty payments for 2017 were $17,500.

Instructions

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

Land Leasehold Improvements

Buildings Equipment

Disregard the related accumulated depreciation accounts.

b, List the items in the situation that were not used to determine the answer to (a) above, and indicate where, or if, these items should be included in Reagan’s financial statements.
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