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Chapter 10: Q11BE. (page 532)

Cheng Company traded a used truck for a new truck. The used truck cost \(30,000 and has accumulated depreciation of \)27,000. The new truck is worth \(37,000. Cheng also made a cash payment of \)36,000. Prepare Cheng’s entry to record the exchange. (The exchange lacks commercial substance.)

Short Answer

Expert verified

The new truck would be recorded at$39,000 for deferring loss of $2,000.

Step by step solution

01

Computation of fair value of the old truck and gain/loss on exchange

Fairvalueoftheoldtruck=Finalvalueofthenewtruck-Cashpaid=$37,000-$36,000=$1,000

Gain/Lossonexchange=Fairvalueofthetruck-Bookvalueofoldtruck=$1,000-($30,000-$27,000)=$1,000-$3,000=$2,000

02

Journal entry

As the exchange lacks commercial substance, the loss would be deferred and the basis of the new truck would be as follows:

Basisofnewtruck=Fairvalueofnewtruck+DefferedLoss=$37,000+$2000=$39,000

Journal entry

Date

Description

Debit

Credit

New Truck

$39,000

Accumulated Depreciation

$27,000

Old Truck

$30,000

Cash Paid

$36,000

Being old truck exchanged for a new truck having no commercial substance

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Most popular questions from this chapter

(Accounting for Self-Constructed Assets) Troopers Medical Labs, Inc., began operations 5 years ago producing stetrics, a new type of instrument it hoped to sell to doctors, dentists, and hospitals. The demand for stetrics far exceeded initial expectations, and the company was unable to produce enough stetrics to meet demand.

The company was manufacturing its product on equipment that it built at the start of its operations. To meet demand, more efficient equipment was needed. The company decided to design and build the equipment, because the equipment currently available on the market was unsuitable for producing stetrics.

In 2017, a section of the plant was devoted to development of the new equipment and a special staff was hired. Within 6 months, a machine developed at a cost of \(714,000 increased production dramatically and reduced labor costs substantially. Elated by the success of the new machine, the company built three more machines of the same type at a cost of \)441,000 each.

Instructions

a. In general, what costs should be capitalized for self-constructed equipment?

b. Discuss the propriety of including in the capitalized cost of self-constructed assets:

(1) The increase in overhead caused by the self-construction of fixed assets.

(2) A proportionate share of overhead on the same basis as that applied to goods manufactured for sale.

c. Discuss the proper accounting treatment of the \(273,000 (\)714,000 − $441,000) by which the cost of the first machine exceeded the cost of the subsequent machines. This additional cost should not be considered research and development costs.

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of \(315,000. The estimated fair values of the assets are land \)60,000, building \(220,000, and equipment \)80,000. At what amounts should each of the three assets be recorded?

Question: Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets. (a) Land. (b) Machinery and equipment. (c) Buildings

(Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.

Schedule of Property Dispositions

Cost

Accumulated Depreciation

Cash

Proceeds

Fair Value

Nature of Disposition

Land

\(40,000

—

\)31,000

\(31,000

Condemnation

Building

15,000

—

3,600

—

Demolition

Warehouse

70,000

\)16,000

74,000

74,000

Destruction by fire

Machine

8,000

2,800

900

7,200

Trade-in

Furniture

10,000

7,850

—

3,100

Contribution

Automobile

9,000

3,460

2,960

2,960

Sale

The following additional information is available.

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased for \(35,000.

Building: On April 2, land and building were purchased at a total cost of \)75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated \(16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of \)90,000.

Machine: On December 26, the machine was exchanged for another machine having a fair value of \(6,300 and cash of \)900 was received. (The exchange lacks commercial substance.)

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

Instructions

Indicate how these items would be reported on the income statement of Hollerith Co.

(Nonmonetary Exchanges) You have two clients that are considering trading machinery with each other. Although the machines are different from each other, you believe that an assessment of expected cash flows on the exchanged assets will indicate the exchange lacks commercial substance. Your clients would prefer that the exchange be deemed to have commercial substance, to allow them to record gains. Here are the facts:

Client A

Client B

Original cost

\(100,000

\)150,000

Accumulated depreciation

40,000

80,000

Fair value

80,000

100,000

Cash received (paid)

(20,000)

20,000

Instructions

  1. Record the trade-in on Client A’s books assuming the exchange has commercial substance.
  2. Record the trade-in on Client A’s books assuming the exchange lacks commercial substance.
  3. Write a memo to the controller of Company A indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
  4. Record the entry on Client B’s books assuming the exchange has commercial substance.
  5. Record the entry on Client B’s books assuming the exchange lacks commercial substance.
  6. Write a memo to the controller of Company B indicating and explaining the dollar impact on current and future statements of treating the exchange as having, versus lacking, commercial substance.
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