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Chapter 10: Q15E (page 538)

(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, for \(105,000, paying \)30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2017. An assumed interest rate of 10% is implicit in the purchase price.

Instructions

(Round to two decimal places.)

  1. Prepare the journal entry(ies) at the date of purchase.
  2. Prepare the journal entry(ies) at December 31, 2017, to record the payment and interest (effective-interest method employed).
  3. Prepare the journal entry(ies) at December 31, 2018, to record the payment and interest (effective-interest method employed).

Short Answer

Expert verified
  1. The capitalized value of the equipment is $86,861.85
  2. Interest expense = $5,686.91
  3. Discount on Notes Payable = $4,754.80

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

(a) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Equipment

86,861.85

Discount on Notes Payable

18,138.15

Cash

30,000.00

Notes Payable

75,000.00

(To record the purchase of equipment)

Working notes:

Calculation of value of equipment

Equipment=(Installmentamount××PVfactor)+Downpayment=($15,000×3.79079)+30,000.00=$56,861.85+30,000.00=$86,861.85

Note: PV of $15,000 annuity @ 10% for 5 years

03

(b) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Notes Payable

15,000.00

Interest Expense

5,686.19

Cash

15,000.00

Discount on Notes Payable

5,686.19

(To record the first year payment)

Working notes:

Preparing schedule year-by-year

Year

Note Payment

A

10% Interest

(Balance*10%)

B

Reduction of Principal

(A-B)

Balance

12/31/16

$56,861.85

12/31/17

$15,000.00

$5,686.19

$9,313.81

47,548.04

12/31/18

15,000.00

4,754.80

10,245.20

37,302.84

04

(c) Preparing journal entry

Date

Particular

Debit ($)

Credit ($)

Notes Payable

15,000.00

Interest Expense

4,754.80

Cash

15,000.00

Discount on Notes Payable

4,754.80

(To record the second year payment)

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Most popular questions from this chapter

Slaton Corporation traded a used truck for a new truck. The used truck cost \(20,000 and has accumulated depreciation of \)17,000. The new truck is worth \(35,000. Slaton also made a cash payment of \)33,000. Prepare Slaton’s entry to record the exchange. (The exchange has commercial substance.)

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.

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.

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.

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

Book value

\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.
See all solutions

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