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Chapter 10: Q03E (page 533)

(Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2017. The terms of acquisition for each truck are described below.

  1. Truck #1 has a list price of \(15,000 and is acquired for a cash payment of \)13,900.
  2. Truck #2 has a list price of \(16,000 and is acquired for a down payment of \)2,000 cash and a zero-interest-bearing note with a face amount of \(14,000. The note is due April 1, 2018. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
  3. Truck #3 has a list price of \)16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost \(12,000 and is normally sold by Clarkson for \)15,200. Clarkson uses a perpetual inventory system.
  4. Truck #4 has a list price of \(14,000. It is acquired in exchange for 1,000 shares of common stock in Clarkson Corporation. The stock has a par value per share of \)10 and a market price of $13 per share.

Instructions

Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.

Short Answer

Expert verified

Answer

1) Value of Trucks = $13,900

2) Value of Trucks = $14,727.26

3) Value of Trucks = $15,200

4) Common Stock = $3,000

Step by step solution

01

Meaning of Acquisition Cost

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

02

 Step 2: (1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Trucks

13,9000.00

Cash

13,900.00





03

(2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Trucks

14,727,26

Discount on Notes Payable

Cash

1,272.74

2,000.00

Notes Payable



Working Notes:

For calculating the value of truck, the present value should be ascertained first.

Calculation of Present Value for Year 1

Presentvalue=FaceValue脳PVFactor=$14,000脳0,90909=$12,727.26

Calculation of value of trucks

TruckValue=PresentValue+DownPayment=$12,727.26+$2,000=$14,727.26

04

(3) Preparing journal entries

Date

Particulars

Debit ($)

Credit($)

Trucks

15,2000.00

Cost of Good Sold

12,000.00

Inventory

12,000.00

Sales Revenue

15,200.00

Note: The selling (retail) price of the computer system appears to be a better measure of the fair worth of the consideration received than the list price of the vehicle (truck). Vehicles are frequently offered for less than the stated price.

05

(4) Preparing journal entries

Date

Particulars

Debit ($)($)

Credit ($)

Trucks

13,000.00

Common Stock

10,000.00

Paid-in Capital in Excess of Par

Common Stock

3,000.00

Working notes:

Calculation of common stock

CommonStock=Shares脳PerShareValue=1,000脳$13=$13,000

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Most popular questions from this chapter

  1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres Co., for a lump-sum price of \(700,000. At the time of purchase, Torres鈥檚 assets had the following book and appraisal values.

Book Values

Appraisal Values

Land

\)200,000

\(150,000

Buildings

250,000

350,000

Equipment

300,000

300,000

To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

  1. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

  1. Kim Company purchased office equipment for \)20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

  1. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is \(27,000. The company made no entry to record the land because it had no cost basis.
  2. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

What accounting treatment is normally given to the following items in accounting for plant assets? (a) Additions. (b) Major repairs. (c) Improvements and replacements.

Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)42,000 to raze the old buildings and sold salvaged lumber and brick for \(6,300. Legal fees of \)1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost \(1,500, and a liability insurance premium paid during construction was \)900. The contractor鈥檚 charge for construction was \(2,740,000. The company paid the contractor in two installments: \)1,200,000 at the end of 3 months and \(1,540,000 upon completion. Interest costs of \)170,000 were incurred to finance the construction. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.

Question: Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.

(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,

and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) \((275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect鈥檚 fee on building 22,000

(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Instructions

Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be

reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Item Land Land Improvements Buildings Other Accounts
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