91Ó°ÊÓ

(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’s 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.

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

(1) Preparing journal entry

Date	Equipment=Totalcostofasset×AppraisalvaluesTotalAppraisalvalues=700,000×300,000800,000=262,500Particulars	Debit ($)	Credit ($)
	Land	131,250
	Buildings	306,250
	Equipment	262,500
	Cash		700,000

Working notes:

Calculation of land

$$\begin{gathered} Land=Total\cos tofAsset×\frac{AppraisalValues}{TotalAppraisalValues} \\ =700,000×\frac{150,000}{800,000} \\ =131,250 \end{gathered}$$

Calculation of building

$$\begin{gathered} Building=Total\cos tofAsset×\frac{AppraisalValues}{TotalAppraisalValues} \\ =700,000×\frac{350,000}{800,000} \\ =306,250 \end{gathered}$$

Calculation of equipment

$Equipment=Total\cos tofasset×\frac{Appraisalvalues}{Totalappraisalvalues}$

localid="1656416365489" $=700,000×\frac{300,000}{800,000}$

localid="1656416386613" $=262,500$

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

$$\begin{gathered} Accountpayble=Equipment\cos t-\left(Equipment\cos t×Rateofperiod\right) \\ =20,000-\left(20,000-2\%\right) \\ =20,000-400 \\ =19,600 \end{gathered}$$

$$\begin{gathered} Accountpayble=Equipment\cos t-\left(Equipment\cos t×Rateofperiod\right) \\ =20,000-\left(20,000-2\%\right) \\ =20,000-400 \\ =19,600 \end{gathered}$$

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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