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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

Johnson & Johnson, the world鈥檚 leading and most diversified healthcare corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.

1.Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

Building and building equipment 20鈥�40 years

Land and leasehold improvements 10鈥�20 years

Machinery and equipment 2鈥�13 years

4. Property, Plant and Equipment

At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were:

(dollars in millions) 2014 2013

Land and land improvements \( 833 \) 885

Buildings and building equipment 10,046 10,423

Machinery and equipment 22,206 22,527

Construction in progress 3,600 3,298

36,685 37,133

Less accumulated depreciation 20,559 20,423

\(16,126 \)16,710

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was \(115 million, \)105 million and \(115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was \)2.5 billion, \(2.7 billion and \)2.5 billion, respectively.

Johnson & Johnson provided the following selected information in its 2014 cash flow statement.

Johnson & Johnson

2014 Annual Report

Consolidated Financial Statements (excerpts)

Net cash flows from operating activities \(18,471

Cash flows from investing activities

Additions to property, plant and equipment (3,714)

Proceeds from the disposal of assets 4,631

Acquisitions, net of cash acquired (2,129)

Purchases of investments (34,913)

Sales of investments 24,119

Other (primarily intangibles) (299)

Net cash used by investing activities (12,305)

Cash flows from financing activities

Dividends to shareholders (7,768)

Repurchase of common stock (7,124)

Proceeds from short-term debt 1,863

Retirement of short-term debt (1,267)

Proceeds from long-term debt 2,098

Retirement of long-term debt (1,844)

Proceeds from the exercise of stock options/excess tax benefits 1,782

Net cash used by financing activities (12,260)

Effect of exchange rate changes on cash and cash equivalents (310)

Increase in cash and cash equivalents (6,404)

Cash and cash equivalents, beginning of year (Note 1) 20,927

Cash and cash equivalents, end of year (Note 1) \)14,523

Supplemental cash flow data

Cash paid during the year for:

Interest $ 603

Income taxes 3,536

Instructions

  1. What was the cost of buildings and building equipment at the end of 2014?
  2. Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?
  3. What was the actual interest paid by the company in 2014? 鈥�
  4. What is Johnson & Johnson鈥檚 free cash flow? From the information provided, comment on Johnson & Johnson鈥檚 financial flexibility.

Question: Indicate where the following items would be shown on a balance sheet. (a) A lien that was attached to the land when purchased. (b) Landscaping costs. (c) Attorney鈥檚 fees and recording fees related to purchasing land. (d) Variable overhead related to construction of machinery. (e) A parking lot servicing employees in the building. (f) Cost of temporary building for workers during construction of building. (g) Interest expense on bonds payable incurred during construction of a building. (h) Assessments for sidewalks that are maintained by the city. (i) The cost of demolishing an old building that was on the land when purchased.

(Analysis of Subsequent Expenditures) The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.

Jan. 30 A building that cost \(132,000 in 2000 is torn down to make room for a

New building. The wrecking contractor was paid \)5,100 and was

permitted to keep all materials salvaged.

Mar. 10 Machinery that was purchased in 2010 for \(16,000 is sold for \)2,900

cash, f.o.b. purchaser鈥檚 plant. Freight of \(300 is paid on the sale of this

machinery.

Mar. 20 A gear breaks on a machine that cost \)9,000 in 2009. The gear is

replaced at a cost of \(2,000. The replacement does not extend the

useful life of the machine but does make the machine more efficient.

May 18 A special base installed for a machine in 2011 when the machine was

purchased has to be replaced at a cost of \)5,500 because of defective

workmanship on the original base. The cost of the machinery was

\(14,200 in 2011. The cost of the base was \)3,500, and this amount was

charged to the Machinery account in 2011.

June 23 One of the buildings is repainted at a cost of $6,900. It had not been

painted since it was constructed in 2013.

Instructions

Prepare general journal entries for the transactions. (Round to the nearest dollar.)

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?

Question: Pueblo Co. acquires machinery by paying \(10,000 cash and signing a \)5,000, 2-year, zero-interest-bearing note payable. The note has a present value of \(4,208, and Pueblo purchased a similar machine last month for \)13,500. At what cost should the new equipment be recorded?
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