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Chapter 10: Q20E (page 539)

(Nonmonetary Exchange) Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of \(8,000 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid \)8,000 cash and traded in used equipment. The used equipment had originally cost \(62,000; it had a book value of \)42,000 and a secondhand fair value of \(47,800, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of \)1,100.

Instructions

  1. Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
  2. Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable, prepare the general journal entry to record this transaction.

Short Answer

Expert verified
  1. The cost of new equipment is $56,900
  2. The basis of new equipment is $51,100

Step by step solution

01

Meaning of Acquisition of cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

02

(a) Preparing journal entry

The exchange has commercial substance

Date

Particular

Debit ($)

Credit ($)

Equipment

56,900

Accumulated Depreciation-Equipment

20,000

Gain on Disposal of Equipment

5,800

Equipment

62,000

Cash

9,100

Working notes:

Calculation of Valuation of equipment

Cash

$ 8,000

Installation cost

1,100

The market value of used equipment

47,800

Cost of new equipment

$56,900

Computation of gain

The fair value of an old asset

$47,800

Cost of old asset $62,000

Less: Accumulated depreciation 20,000

Book value of the old asset

(42,000)

Gain on disposal of equipment

$ 5,800

03

(b) Preparing journal entry

Fair value information is not determinable

Date

Particular

Debit ($)

Credit ($)

Equipment

51,100

Accumulated Depreciation-Equipment

20,000

Equipment

62,000

Cash

9,100

Working notes:

Basis of new equipment

Book value of old equipment

$42,000

Cash paid (including installation costs)

9,100

Basis of new equipment

$51,100

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Most popular questions from this chapter

(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.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson’s weighted-average accumulated expenditures for interest capitalization purposes.

(Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.

The Land and Buildings account reported the following items during 2018.

January 31

Land and buildings

\(160,000

February 28

Cost of removal of building

9,800

May 1

Partial payment of new construction

60,000

May 1

Legal fees paid

3,770

June 1

Second payment on new construction

40,000

June 1

Insurance premium

2,280

June 1

Special tax assessment

4,000

June 30

General expenses

36,300

July 1

Final payment on new construction

30,000

December 31

Asset write-up

53,800

399,950

December 31

Depreciation—2018 at 1%

(4,000)

December 31, 2018

Account balance

\)395,950

The following additional information is to be considered.

1. To acquire land and building, the company paid \(80,000 cash and 800 shares of its 8% cumulative preferred stock, par value \)100 per share. Fair value of the stock is \(117 per share.

2. Cost of removal of old buildings amounted to \)9,800, and the demolition company retained all materials of the building.

3. Legal fees covered the following.

Cost of organization
\( 610
Examination of title covering purchase of land
1,300
Legal work in connection with construction contract
1,860

\)3,770

4. Insurance premium covered the building for a 2-year term beginning May 1, 2018.

5. The special tax assessment covered street improvements that are permanent in nature.

6. General expenses covered the following for the period from January 2, 2018, to June 30, 2018.

President’s salary
\(32,100
Plant superintendent’s salary—supervision of new building

4,200

\)36,300


7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building \(53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.

8.Estimated life of building—50 years. Depreciation for 2018—1% of asset value (1% of \)400,000, or $4,000).

Instructions

  1. Prepare entries to reflect correct land, buildings, and depreciation accounts at December 31, 2018.
  2. Show the proper presentation of land, buildings, and depreciation on the balance sheet at December 31, 2018.

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.)

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company’s stock price to go down.

Instructions

Answer the following questions.

  1. What stakeholder interests are in conflict?
  2. What ethical issues does Carter face?
  3. How should these costs be allocated?
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