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Chapter 9: Q20RQ (page 526)

What does it mean if an exchange of plant assets has commercial substance? Are gains and losses recorded on the books because of the exchange?

Short Answer

Expert verified

An exchange having commercial substancewill affect the business鈥檚 future cash flow, and the gains or losses arising from the same must be recorded in the books of accounts.

Step by step solution

01

Definition of Plant Assets

The assets employed in the business unit for the long-term purpose of producing goods or services are known as plant assets. These assets are charged with expenses known as depreciation.

02

Exchange of plant assets having commercial substance

The exchange of plant assets has commercial substance when the exchange affects the future cash flow of the business entity.

If the exchange has commercial substance, the business entity must record the gain or loss arising from such exchange.

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Most popular questions from this chapter

: Distinguishing capital expenditures from revenue expenditures consider the following expenditures:

a. Purchase price.

b. Ordinary recurring repairs to keep the machinery in good working order.

c. Lubrication before machinery is placed in service.

d. Periodic lubrication after machinery is placed in service.

e. Major overhaul to extend useful life by three years.

f. Sales tax paid on the purchase price.

g. Transportation and insurance while machinery is in transit from seller to buyer.

h. Installation.

i. Training of personnel for initial operation of the machinery. Classify each of the expenditures as a capital expenditure or revenue expenditure

This problem continues the Canyon Canoe Company situation from Chapter 8. Amber and Zack Wilson are continuing to review business practices. Currently, they are reviewing the company鈥檚 property, plant, and equipment and have gathered the following information:

Asset

Acquisition Date

Cost

Estimated Life

Estimated Residual value

Depreciation Method

Monthly Depreciation Expense

Canoes

Nov. 3, 2018

\(4,800

4 Years

\) 0

SL

$100

Land

Dec 1, 2018

85,000

n/a

Building

Dec 1, 2018

35,000

5 Years

5,000

SL

500

Canoes

Dec 2, 2018

7,200

4 Years

0

SL

150

Computer

Mar. 2, 2019

3,600

3 Years

300

DDB

Office Furniture

MAR. 3, 2019

3,000

5 Years

600

SL

*SL = Straight@line; DDB = Double@declining@balance

Requirements

1. Calculate the amount of monthly depreciation expense for the computer and office furniture for 2019.

2. For each asset, determine the book value as of December 31, 2018. Then, calculate the depreciation expense for the first six months of 2019 and the book value as of June 30, 2019.

3. Prepare a partial balance sheet showing Property, Plant, and Equipment as of June 30, 2019.

Question: On January 1, Orange Manufacturing paid $40,000 for a patent. Although it gives legal protection for 20 years, the patent is expected to provide a competitive advantage for only eight years. Assuming the straight-line method of amortization, record the journal entry for amortization for Year 1.

A Recording lump-sum asset purchases, depreciation, and disposals Ellie Johnson Associates surveys American eating habits. The company鈥檚 accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the following transactions:

Jan. 1 Purchased office equipment, \(113,000. Paid \)80,000 cash and financed the remainder with a note payable.

Apr. 1 Acquired land and communication equipment in a lump-sum purchase. Total cost was \(310,000 paid in cash. An independent appraisal valued the land at \)244,125 and the communication equipment at \(81,375.

Sep. 1 Sold a building that cost \)520,000 (accumulated depreciation of \(285,000 through December 31 of the preceding year). Ellie Johnson Associates received \)420,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-year useful life and a residual value of \(25,000.

Dec. 31 Recorded depreciation as follows:

Communication equipment is depreciated by the straight-line method over a five-year life with zero residual value.

Office equipment is depreciated using the double-declining-balance method over five years with a \)1,000 residual value.

Record the transactions in the journal of Ellie Johnson Associate

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

Book value of assets \( 700,000

Market value of assets 1,000,000

Market value of liabilities 510,000

Requirements

1. Journalize the entry to record Core鈥檚 purchase of Surety Wireless for \)280,000 cash plus a $420,000 note payable.

2. What special asset does Core鈥檚 acquisition of Surety Wireless identify? How should Core Telecom account for this asset after acquiring Surety Wireless? Explain in detail.
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