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Chapter 10: Q10P (page 541)

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

Marshall Const.

Brigham Mfg. Co.

Fair value of old crane

\( 82,000

Fair value of new crane

\)200,000

Cash paid

118,000

Cash received

118,000

Instructions

  1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
  3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.

Short Answer

Expert verified

Answer

  1. 1. Loss on disposal of equipment: $8,000

2. Cost of goods sold: $165,000

b) 1. Accumulated depreciation: $50,000

2. Brigham should make the identical entry as in section (a)

c) 1. Equipment value: $200,000

2. Gain on disposal of equipment: $8,000

d) 1. Gain on Disposal of Equipment: $7,000

2. Sales revenue: $200,000

Step by step solution

01

Meaning of Non-Interest Bearing Liabilities

Non-Interest Bearing Liabilities are the sums of money due by a corporation (a debt on the balance sheet, current or non-current) that are not subject to interest or penalties. Non-Interest Bearing Liabilities, for the avoidance of doubt, do not include liabilities linked to deferred taxes, pensions, retirement, or leases.

02

(a1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Loss on Disposal of Equipment

8,000

Equipment

140,000

Cash

118,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss

Book value of the old crane

$90,000

Less: Fair value of the old crane

82,000

Loss on disposal of equipment

$ 8,000

03

(a2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Cash

118,000

Inventory

82,000

Sales Revenue

200,000

Cost of Goods Sold

165,000

Inventory

165,000

04

(b 1) Preparing journal entries

Since the trade resulted in a loss, Marshall Construction should record the same entry as component (a) above.

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Loss on Disposal of Equipment

8,000

Equipment

140,000

Cash

118,000

05

(b2) Explaining the journal entry of Brigham Manufacturing

Brigham should make the identical entry as in section (a) above. Because we assume Marshall is a client, no gain is postponed. Furthermore, because the cash involved exceeds 25% of the exchange value, the entire transaction is treated as a monetary transaction, and a profit is realized.

06

(c1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment ($98,000 + $102,000)

200,000

Accumulated Depreciation-Equipment

50,000

Equipment

140,000

Cash

102,000

Gain on Disposal of Equipment

8,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss

Book value of the old crane

$90,000

Less: Fair value of the old crane

82,000

Loss on disposal of equipment

$ 8,000

07

(c2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment ($98,000 + $102,000)

200,000

Accumulated Depreciation-Equipment

50,000

Equipment

140,000

Cash

102,000

Gain on Disposal of Equipment

8,000

08

(d1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Cash

103,000

Equipment

140,000

Gain on Disposal of Equipment

7,000

Calculation of gain on disposal of equipment.

Gain on Disposal of Equipment

Fair Value–Old

$97,000

Less:Book Value–Old

($90,000)

$ 7,000

Note: Since the cash invested exceeds 25% of the exchange value, the gain is not delayed.

09

(d2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Cash

103,000

Inventory

97,000

Sales Revenue

200,000

Cost of Goods Sold

165,000

Inventory

165,000

Note:The same reasons as those cited in (b2) above apply here:

The cash paid exceeds 25% of the total fair value. Therefore the transaction is recognized as a monetary exchange and recorded at fair value, notwithstanding the lack of commercial content. It's worth noting that a trade involving this much money is unlikely to be without business substance.

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Most popular questions from this chapter

(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.

(Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter

\(15,800

Cash paid

10,000

Cost of old melter (5-year life, \)700 salvage value)

11,200

Accumulated depreciation—old melter (straight-line)

6,300

Secondhand fair value of old melter

5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange

  1. has commercial substance, and
  2. lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

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.

(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.

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
  2. What are the objectives for capitalizing interest?
  3. Discuss which assets qualify for interest capitalization.
  4. Is there a limit to the amount of interest that may be capitalized in a period?
  5. If interest capitalization is allowed, what disclosures are required?
See all solutions

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