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Chapter 10: Q12Q (page 530)

Question: Discuss the basic accounting problem that arises in handling each of the following situations. (a) Assets purchased by issuance of common stock. (b) Acquisition of plant assets by gift or donation. (c) Purchase of a plant asset subject to a cash discount. (d) Assets purchased on a long-term credit basis. (e) A group of assets acquired for a lump sum. (f) An asset traded in or exchanged for another asset.

Short Answer

Expert verified

Answer

Basis accounting problem that arises in each situation is related to the valuation of the assets purchased. Each situation is related to at which cost asset is recorded in the books.

Step by step solution

01

Purchase of asset by issue of common stock

Accounting problem in case of purchase of asset by issue of common stock is arises to determine the value of asset. In this case, value of asset is not based on the par value of the common stock. Company uses the market value of stock to determine the value of the property.

02

Plant asset acquired in form of gift or donation

Company did not pay any price when plant asset is acquired by gift or donation. So, accounting problem of valuation of asset arises. In this case, fair value of the asset is used.

03

Plant asset purchased on cash discount

Plant asset purchased at cash discount arise the problem of treatment of cash discount. Whether cash discount is subtracted from the total cost or not. Both the treatments are used by the accountants.

04

Asset purchased on long term credit

When asset is purchased by the company on the credit which is payable in more than one accounting period. Then the problem of recording of asset arises. So, company record the asset at present value of consideration exchanged.

05

Purchase at lump sum

Company purchases more than one asset by paying a single price for all of them. In this case, allocation of cost among all assets is the major problem. So, accountant allocate the cost on fair value basis.

06

Exchange of asset for new asset

In this case, problem of recording of new asset arises. So, accountant record the asset at the fair value of the new asset.

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Most popular questions from this chapter

(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.

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.)

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect’s fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation’s books and in its annual financial statements?

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

Johnson & Johnson, the world’s leading and most diversified healthcare corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.

1.Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

Building and building equipment 20–40 years

Land and leasehold improvements 10–20 years

Machinery and equipment 2–13 years

4. Property, Plant and Equipment

At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were:

(dollars in millions) 2014 2013

Land and land improvements \( 833 \) 885

Buildings and building equipment 10,046 10,423

Machinery and equipment 22,206 22,527

Construction in progress 3,600 3,298

36,685 37,133

Less accumulated depreciation 20,559 20,423

\(16,126 \)16,710

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was \(115 million, \)105 million and \(115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was \)2.5 billion, \(2.7 billion and \)2.5 billion, respectively.

Johnson & Johnson provided the following selected information in its 2014 cash flow statement.

Johnson & Johnson

2014 Annual Report

Consolidated Financial Statements (excerpts)

Net cash flows from operating activities \(18,471

Cash flows from investing activities

Additions to property, plant and equipment (3,714)

Proceeds from the disposal of assets 4,631

Acquisitions, net of cash acquired (2,129)

Purchases of investments (34,913)

Sales of investments 24,119

Other (primarily intangibles) (299)

Net cash used by investing activities (12,305)

Cash flows from financing activities

Dividends to shareholders (7,768)

Repurchase of common stock (7,124)

Proceeds from short-term debt 1,863

Retirement of short-term debt (1,267)

Proceeds from long-term debt 2,098

Retirement of long-term debt (1,844)

Proceeds from the exercise of stock options/excess tax benefits 1,782

Net cash used by financing activities (12,260)

Effect of exchange rate changes on cash and cash equivalents (310)

Increase in cash and cash equivalents (6,404)

Cash and cash equivalents, beginning of year (Note 1) 20,927

Cash and cash equivalents, end of year (Note 1) \)14,523

Supplemental cash flow data

Cash paid during the year for:

Interest $ 603

Income taxes 3,536

Instructions

  1. What was the cost of buildings and building equipment at the end of 2014?
  2. Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?
  3. What was the actual interest paid by the company in 2014? ‘
  4. What is Johnson & Johnson’s free cash flow? From the information provided, comment on Johnson & Johnson’s financial flexibility.
See all solutions

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