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Chapter 10: 22Q (page 502)

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

Short Answer

Expert verified

Neville enterprise should not hide the information from the investors about fully depreciated assets. The company mentions that assets are fully depreciated and used in the business operations in the financial statements.

Step by step solution

01

Full discloser

The company discloses all the relevant and material information to the financial statement users and does not hide any fact or information that affects their financial decisions.

02

Disclosure of fully depreciated assets

Neville enterprise uses the incorrect treatment for the fully depreciated assets. The company should disclose that assets are still used by the company even if the assets are fully depreciated. Either Neville enterprise shows these assets in the balance sheet or recognizes them as the gain from the salvage value.

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Most popular questions from this chapter

(Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.

  1. Dorsett Company offered to exchange a similar machine plus \(23,000. (The exchange has commercial substance for both parties.)
  2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
  3. Liston Company offered to exchange a similar machine, but wanted \)3,000 in addition to Holyfield鈥檚 machine. (The exchange has commercial substance for both parties.)

In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay \(93,000 in addition to trading in its old machine.

Holyfield

Dorsett

Winston

Liston

Greeley

Machine cost

\)160,000

\(120,000

\)152,000

\(160,000

\)130,000

Accumulated depreciation

60,000

45,000

71,000

75,000

鈥�0鈥�

Fair value

92,000

69,000

92,000

95,000

185,000

Instructions

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

Question: (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of \(10,000. Presented below are three independent cases related to the equipment. (Round to the nearest dollar.)

  1. Geddes paid cash for the equipment 8 days after the purchase. The vendor鈥檚 credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
  2. Geddes traded in equipment with a book value of \)2,000 (initial cost \(8,000), and paid \)9,500 in cash one month after the purchase. The old equipment could have been sold for \(400 at the date of trade. (The exchange has commercial substance.)
  3. Geddes gave the vendor a \)10,800 zero-interest-bearing note for the equipment on the date of purchase. The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.

Instructions

Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.

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?

(Capitalization of Interest) On December 31, 2016, Main Inc. borrowed \(3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, \)360,000; June 1, \(600,000; July 1, \)1,500,000; December 1, \(1,500,000. The building was completed in February 2018. Additional information is provided as follows.

1. Other debt outstanding

10-year, 13% bond, December 31, 2010, interest payable annually \)4,000,000

6-year, 10% note, dated December 31, 2014, interest payable

annually \(1,600,000

2. March 1, 2017, expenditure included land costs of \)150,000

3. Interest revenue earned in 2017 $49,000

Instructions

(a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense at December 31, 2017.

Question: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?
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