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Chapter 10: Q10P (page 541)

Question: (Nonmonetary Exchanges) During the current year, Marshall Construction trades an old crane with a book value of \(90,000 (original cost \)140,000 less accumulated depreciation of \(50,000) for a new crane from Brigham Manufacturing Co. The new crane cost Brigham \)165,000 to manufacture and is classified as inventory. The following information is also available.

Marshall Const.

Brigham Mfg. Co.

Fair value of old crane

\( 82,000

Fair value of new crane

\)200,000

Cash paid

118,000

Cash received

118,000

Instructions

  1. Assuming that this exchange is considered to have commercial substance, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  2. Assuming that this exchange lacks commercial substance for Marshall, prepare the journal entries on the books of Marshall Construction.
  3. Assuming the same facts as those in (a), except that the fair value of the old crane is \(98,000 and the cash paid is \)102,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.
  4. Assuming the same facts as those in (b), except that the fair value of the old crane is \(97,000 and the cash paid \)103,000, prepare the journal entries on the books of
    1. Marshall Construction and
    2. Brigham Manufacturing.

Short Answer

Expert verified

Answer

  1. 1. Loss on disposal of equipment: $8,000

2. Cost of goods sold: $165,000

b) 1. Accumulated depreciation: $50,000

2. Brigham should make the identical entry as in section (a)

c) 1. Equipment value: $200,000

2. Gain on disposal of equipment: $8,000

d) 1. Gain on Disposal of Equipment: $7,000

2. Sales revenue: $200,000

Step by step solution

01

Meaning of Non-Interest Bearing Liabilities

Non-Interest Bearing Liabilities are the sums of money due by a corporation (a debt on the balance sheet, current or non-current) that are not subject to interest or penalties. Non-Interest Bearing Liabilities, for the avoidance of doubt, do not include liabilities linked to deferred taxes, pensions, retirement, or leases.

02

(a1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Loss on Disposal of Equipment

8,000

Equipment

140,000

Cash

118,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss

Book value of the old crane

$90,000

Less: Fair value of the old crane

82,000

Loss on disposal of equipment

$ 8,000

03

(a2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Cash

118,000

Inventory

82,000

Sales Revenue

200,000

Cost of Goods Sold

165,000

Inventory

165,000

04

(b 1) Preparing journal entries

Since the trade resulted in a loss, Marshall Construction should record the same entry as component (a) above.

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Loss on Disposal of Equipment

8,000

Equipment

140,000

Cash

118,000

05

(b2) Explaining the journal entry of Brigham Manufacturing

Brigham should make the identical entry as in section (a) above. Because we assume Marshall is a client, no gain is postponed. Furthermore, because the cash involved exceeds 25% of the exchange value, the entire transaction is treated as a monetary transaction, and a profit is realized.

06

(c1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment ($98,000 + $102,000)

200,000

Accumulated Depreciation-Equipment

50,000

Equipment

140,000

Cash

102,000

Gain on Disposal of Equipment

8,000

Working notes:

Calculation of loss on disposal of equipment.

Computation of loss

Book value of the old crane

$90,000

Less: Fair value of the old crane

82,000

Loss on disposal of equipment

$ 8,000

07

(c2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment ($98,000 + $102,000)

200,000

Accumulated Depreciation-Equipment

50,000

Equipment

140,000

Cash

102,000

Gain on Disposal of Equipment

8,000

08

(d1) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Equipment

200,000

Accumulated Depreciation-Equipment

50,000

Cash

103,000

Equipment

140,000

Gain on Disposal of Equipment

7,000

Calculation of gain on disposal of equipment.

Gain on Disposal of Equipment

Fair Value鈥揙ld

$97,000

Less:Book Value鈥揙ld

($90,000)

$ 7,000

Note: Since the cash invested exceeds 25% of the exchange value, the gain is not delayed.

09

(d2) Preparing journal entries

Date

Particulars

Debit ($)

Credit ($)

Cash

103,000

Inventory

97,000

Sales Revenue

200,000

Cost of Goods Sold

165,000

Inventory

165,000

Note:The same reasons as those cited in (b2) above apply here:

The cash paid exceeds 25% of the total fair value. Therefore the transaction is recognized as a monetary exchange and recorded at fair value, notwithstanding the lack of commercial content. It's worth noting that a trade involving this much money is unlikely to be without business substance.

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Most popular questions from this chapter

(Interest During Construction) Grieg Landscaping began construction of a new plant on December 1, 2017. On this date, the company purchased a parcel of land for \(139,000 in cash. In addition, it paid \)2,000 in surveying costs and \(4,000 for a title insurance policy. An old dwelling on the premises was demolished at a cost of \)3,000, with \(1,000 being received from the sale of materials.

Architectural plans were also formalized on December 1, 2017, when the architect was paid \)30,000. The necessary building permits costing \(3,000 were obtained from the city and paid for on December 1 as well. The excavation work began during the first week in December with payments made to the contractor in 2018 as follows.

Date of Payment

Amount of Payment

March 1

\)240,000

May 1

330,000

July 1

60,000

The building was completed on July 1, 2018.

To finance construction of this plant, Grieg borrowed \(600,000 from the bank on December 1, 2017. Grieg had no other borrowings. The \)600,000 was a 10-year loan bearing interest at 8%.

Instructions

Compute the balance in each of the following accounts at December 31, 2017, and December 31, 2018. (Round amounts to the nearest dollar.)

  1. Land.
  2. Buildings.
  3. Interest Expense.

(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.

Purchase

Cash paid for equipment, including sales tax of \(5,000 \)105,000

Freight and insurance cost while in transit 2,000

Cost of moving equipment into place at factory 3,100

Wage cost for technicians to test equipment 4,000

Insurance premium paid during first year of operation 1,500

on this equipment

Special plumbing fixtures required for new equipment 8,000

Repair cost incurred in first year of operations related 1,300

to this equipment

Construction

Material and purchased parts (gross cost \(200,000;

failed to take 2% cash discount) \)200,000

Imputed interest on funds used during

construction (stock financing) 14,000

Labor costs 190,000

Allocated overhead costs (fixed鈥擻(20,000;

variable鈥擻)30,000) 50,000

Profit on self-construction 30,000

Cost of installing equipment 4,400

Instructions

Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.

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.)

(Capitalization of Interest) The following three situations involve the capitalization of interest

Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of \(4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed \)4,000,000 payable in 10 annual installments of \(400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling \)1,500,000 under the contract; the weighted average amount of accumulated expenditures was \(800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of \)250,000.

Instructions

What amount should Oksana Baiul report as capitalized interest at December 31, 2017?

Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

Interest Costs Incurred

Warehouse constructed for Ito鈥檚 own use

\(30,000

Special-order machine for sale to unrelated customer, produced according to customer鈥檚 specifications

9,000

Inventories routinely manufactured, produced on a repetitive basis

8,000

All of these assets required an extended period of time for completion.

Instructions

Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed \)10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled \(7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to \)650,000 for the year.

Instructions

How much should be shown as capitalized interest on Peggy Fleming鈥檚 financial statements on April 30, 2018?

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life
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