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Chapter 10: Q12E (page 537)

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

  1. The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be \(81,000.
  2. 13,000 shares of common stock with a par value of \)50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of \(810,000, of which \)180,000 has been allocated to land and \(630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at \)65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at \(58 per share.

No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed.

Materials used

\)12,500

Factory supplies used

900

Direct labor incurred

15,000

Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used

2,700

Fixed overhead rate applied to regular manufacturing operations

60% of direct labor cost

Cost of similar machinery if it had been purchased from

Outside suppliers

44,000

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

Short Answer

Expert verified
  1. Contribution revenue = $81,000
  2. Common stock = $650,000
  3. Factory overhead = $12,600

Step by step solution

01

Meaning of Acquisition of cost

Acquisition cost refers to a cost incurred by a business entity to purchase a new asset, take over someone's business, etc.

02

(a) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Land

81,000

Contribution Revenue

81,000

(To record the land at fair value)

03

(b) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Land

180,000

Buildings

630,000

Common Stock

650,000

Paid-in Capital in Excess of

Par—Common Stock

160,000

(To common stock is exchanged with land and building)

Working notes:

Calculation the amount of Common stock

Commonstock=Shares×Persharevalue=13,000×$50=$650,000

Note: The property's market value is used as the foundation for registering the asset and issuance of the stock since the market value of the stock is not determinable.

04

(c) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Machinery

40,100

Materials

12,500

Direct Labor

15,000

Factory Overhead

12,600

(To record the overhead)

Working notes:

Calculation of factory overhead

Fixed overhead applied(60%×$15,000)

$9,000

Additional overhead

2,700

Factory supplies used

900

$12,600

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Most popular questions from this chapter

(Acquisition, Improvements, and Sale of Realty) Tonkawa Company purchased land for use as its corporate headquarters. A small factory that was on the land when it was purchased was torn down before construction of the office building began. Furthermore, a substantial amount of rock blasting and removal had to be done to the site before construction of the building foundation began. Because the office building was set back on the land far from the public road, Tonkawa Company had the contractor construct a paved road that led from the public road to the parking lot of the office building.

Three years after the office building was occupied, Tonkawa Company added four stories to the office building. The four stories had an estimated useful life of 5 years more than the remaining estimated useful life of the original office building.

Ten years later, the land and building were sold at an amount more than their net book value, and Tonkawa Company had a new office building constructed in another state for use as its new corporate headquarters.

Instructions

  1. Which of the expenditures above should be capitalized? How should each be depreciated or amortized? Discuss the rationale for your answers.
  2. How would the sale of the land and building be accounted for? Include in your answer an explanation of how to determine the net book value at the date of sale. Discuss the rationale for your answer.

(Analysis of Subsequent Expenditures) King Donovan Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company’s plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Durler Company purchased equipment on January 2, 2013, for \(112,000. The equipment had an estimated useful life of 5 years with an estimated salvage value of \)12,000. Durler uses straight-line depreciation on all assets. On January 2, 2017, Durler exchanged this equipment plus \(12,000 in cash for newer equipment. The old equipment has a fair value of \)50,000.

Accounting

Prepare the journal entry to record the exchange on the books of Durler Company. Assume that the exchange has commercial substance.

Analysis

How will this exchange affect comparisons of the return on asset ratio for Durler in the year of the exchange compared to prior years?

Principles

How does the concept of commercial substance affect the accounting and analysis of this exchange?

Previn Brothers Inc. purchased land at a price of \(27,000. Closing costs were \)1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?

(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.
See all solutions

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