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Chapter 10: Q18E (page 539)

(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.

Short Answer

Expert verified
  1. Accumulated depreciation is $7,000
  2. Accumulated depreciation-Equipment $7,000

Step by step solution

01

Meaning of Commercial Substance

Due to a business entity's transaction, there will be a change in the business's future cash flow; that particular transaction has a commercial substance.

02

(a) Preparing journal entries

The exchange has commercial substance:

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

700

Accumulated Depreciation

Equipment

700

(To record depreciation expense)

Working notes:

Accumulateddepreciation=Costofoldmeltor-SalvagevalueUsefullife×MonthsinnumberMonthsinayear=$11,200-$7005×412=$700

Date

Particular

Debit ($)

Credit ($)

Equipment

15,200

Accumulated Depreciation-Equipment

7,000

Gain on Disposal of Equipment

1,000

Equipment

11,200

Cash

10,000

(To record exchange of equipment)

Working notes:

Calculation of gain on disposable asset

Cost of the old asset

$11,200

Less: Accumulated depreciation ($6,300+$700)

7,000

Book value of the equipment (old)

4,200

Less: Fair value of the old asset

(5,200)

Gain on disposal of equipment

$ 1,000

Calculation of cost of new asset

Asset=Cashpaid+Fairvalueofoldasset=$10,000+$5,200=$15,200

03

(b) Preparing journal entries

Exchange lacks commercial substance:

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

700

Accumulated Depreciation

Equipment

700

(To record depreciation expense)

Equipment (melter)

15,200

Accumulated Depreciation-Equipment

7,000

Gain on Disposal of Equipment

1,000

Equipment

11,200

Cash

10,000

(To record exchange of equipment)

Working notes:

Calculation of cost of new asset

Asset=Cashpaid+Fairvalueofoldasset=$10,000+$5,200=$15,200

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Most popular questions from this chapter

(Capitalization of Interest) On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a \(300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. \)200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final \(100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam’s only outstanding liability at December 31, 2017, is a \)30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Instructions

(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

(1) July 31, 2017.

(2) November 1, 2017.

(3) December 31, 2017.

To what extent do you consider the following items to be proper costs of the fixed asset? Give reasons for your opinions.

  1. Overhead of a business that builds its own equipment.
  2. Cash discounts on purchases of equipment.
  3. Interest paid during the construction of a building.
  4. Cost of a safety device installed on a machine.
  5. Freight on equipment returned before installation, for replacement by other equipment of greater capacity.
  6. Cost of moving machinery to a new location.
  7. Cost of plywood partitions erected as part of the remodeling of the office.
  8. Replastering of a section of the building.
  9. Cost of a new motor for one of the trucks.

Question: Mickelson Inc. owns land that it purchased on January 1, 2000, for \(450,000. At December 31, 2017, its current value is \)770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain

Question: Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?

(Entries for Acquisition of Assets) Presented below is information related to Zonker Company.

1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:

Land

\( 400,000

Buildings

1,200,000

Equipment

800,000

Total

\)2,400,000

Zonker Company gave 12,500 shares of its \(100 par value common stock in exchange. The stock had a market price of \)168 per share on the date of the purchase of the property.

2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building.

Repairs to building

\(105,000

Construction of bases for equipment to be installed later

135,000

Driveways and parking lots

122,000

Remodeling of office space in building, including new partitions and walls

161,000

Special assessment by city on land

18,000

3. On December 20, the company paid cash for equipment, \)260,000, subject to a 2% cash discount, and freight on equipment of $10,500.

Instructions

Prepare entries on the books of Zonker Company for these transactions.
See all solutions

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