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Chapter 10: Q1BE (page 532)
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?
$38,600
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New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month’s wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.
Crowe Company purchased a heavy-duty truck on July 1, 2014, for \(30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of \)6,000. The company uses the straight-line method. It was traded on August 1, 2018, for a similar truck costing \(42,000; \)16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance. What is the entry to record the trade-in?
(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
(Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath’s controller, review the following transactions.
Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a \(28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of \)425 and installation costs of \(500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below.
Future value of \)1 for 4 periods | 1.46 |
Future value of an ordinary annuity for 4 periods | 4.64 |
Present value of \(1 for 4 periods | 0.68 |
Present value of an ordinary annuity for 4 periods | 3.17 |
Transaction 2: On December 1, 2017, Klamath Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to \)220,000 and included the assets listed below. Klamath Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.
Yakima Book Value | Fair Value | |
Inventory | \( 60,000 | \) 50,000 |
Land | 40,000 | 80,000 |
Buildings | 70,000 | 120,000 |
\(170,000 | \)250,000 |
During its fiscal year ended May 31, 2018, Klamath incurred \(8,000 for interest expense in connection with the financing of these assets.
Transaction 3: On March 1, 2018, Klamath Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Klamath intends to use the land for a parking lot. The trucks had a combined book value of \)35,000, as Klamath had recorded \(20,000 of accumulated depreciation against these assets. Klamath’s purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of \)46,000 at the time of the transaction. In addition to the trucks, Klamath Company paid $19,000 cash for the land.
Instructions
For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.
Neville Enterprises has a number of fully depreciated assets that are still being used in the main operations of the business. Because the assets are fully depreciated, the president of the company decides not to show them on the balance sheet or disclose this information in the notes. Evaluate this procedure
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