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Chapter 10: Q06E (page 504)

  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.

Short Answer

Expert verified

Answer

  1. The total value of land, building, and equipment are $700,000.
  2. Notes payable are $23,000
  3. Accounts payable are $19,600
  4. Contribution revenue is $27,000
  5. Cash is $600,000

Step by step solution

01

Meaning of Acquisition CostStep 1: 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

(1) Preparing journal entry

Land=TotalcostofAsset脳AppraisalValuesTotalAppraisalValues=700,000脳150,000800,000=131,250Date

Particulars

Debit ($)

Credit ($)

Land

131,250

Buildings

306,250

Equipment

262,500

Cash

700,000

Working notes:

Calculation of land

Land=TotalcostofAsset脳AppraisalValuesTotalApprisalValues=700,000脳150,000800,000=131,250

Land=TotalcostofAsset脳AppraisalValuesTotalAppraisalValues=700,000脳150,000800,000=131,250

Land=TotalcostofAsset脳AppraisalValuesTotalAppraisalValues=700,000脳150,000800,000=131,250

Calculation of building





Building=Totalcostofasset脳AppraisalvaluesTotalAppraisalvalues=700,000脳350,000800,000=306,250

Building=TotalcostofAsset脳AppraisalValuesTotalAppraisalValues=700,000脳350,000800,000=306,250

Calculation of equipment

width="428">Equipment=Totalcostofasset脳AppraisalValuesTotalAppraisalValues=700,000脳300,000800,000=262,500

Land=TotalcostofAsset脳AppraisalValuesTotalApprisalValues=700,000脳150,000800,000=131,250

03

(2) Preparing journal entry

Particulars

Debit ($)

Credit ($)

Equipment

25,000

Cash

2,000

Notes Payable

23,000

04

(3) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Equipment

19,600

Accounts Payable

19,600

Working notes:

Calculation of accounts payable

Accountpayable=Equipmentcost-Equipmentcost脳Rateofperiod=20,000-20,000-2%=20,000-400=19,600

AccountPayable=Equipmentcost-Equipmentcost脳Rateofperiod=20,000-20,000-2%=20,000-400=19,600

05

(4) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Land

27,000

Contribution Revenue

27,000

06

(5) Preparing journal entry

Date

Particulars

Debit ($)

Credit ($)

Buildings

600,000

Cash

600,000

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Most popular questions from this chapter

Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker鈥檚 commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects鈥� fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair鈥檚 weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

  1. Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
  2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

Navajo Corporation traded a used truck (cost \(20,000, accumulated depreciation \)18,000) for a small computer with a fair value of \(3,300. Navajo also paid \)500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)

(Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.

  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

2. 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


3. 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

4. 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.


5. 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.

(Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of \(5,000,000 on January 1, 2017. Harrisburg expected to complete the building by December 31, 2017. Harrisburg has the following debt obligations outstanding during the construction period.

Construction loan鈥�12% interest, payable semiannually, issued December 31, 2016

\)2,000,000

Short-term loan鈥�10% interest, payable monthly, and principal payable at maturity on May 30, 2018

1,400,000

Long-term loan鈥�11% interest, payable on January 1 of

each year. Principal payable on January 1, 2021

1,000,000

Instructions

(Carry all computations to two decimal places.)

(A) Assume that Harrisburg completed the office and warehouse building on December 31, 2017, as planned at a total cost of \(5,200,000, and the weighted-average amount of accumulated expenditures was \)3,600,000. Compute the avoidable interest on this project.

(B) Compute the depreciation expense for the year ended December 31, 2018. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
See all solutions

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