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Chapter 10: Q11BE. (page 532)

Cheng Company traded a used truck for a new truck. The used truck cost \(30,000 and has accumulated depreciation of \)27,000. The new truck is worth \(37,000. Cheng also made a cash payment of \)36,000. Prepare Cheng鈥檚 entry to record the exchange. (The exchange lacks commercial substance.)

Short Answer

Expert verified

The new truck would be recorded at$39,000 for deferring loss of $2,000.

Step by step solution

01

Computation of fair value of the old truck and gain/loss on exchange

Fairvalueoftheoldtruck=Finalvalueofthenewtruck-Cashpaid=$37,000-$36,000=$1,000

Gain/Lossonexchange=Fairvalueofthetruck-Bookvalueofoldtruck=$1,000-($30,000-$27,000)=$1,000-$3,000=$2,000

02

Journal entry

As the exchange lacks commercial substance, the loss would be deferred and the basis of the new truck would be as follows:

Basisofnewtruck=Fairvalueofnewtruck+DefferedLoss=$37,000+$2000=$39,000

Journal entry

Date

Description

Debit

Credit

New Truck

$39,000

Accumulated Depreciation

$27,000

Old Truck

$30,000

Cash Paid

$36,000

Being old truck exchanged for a new truck having no commercial substance

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Most popular questions from this chapter

(Capitalization of Interest) Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2012. Laserwords鈥� original facility became obsolete by early 2017 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.

On June 1, 2017, Laserwords contracted with Black Construction to have a new building constructed for \(4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.

Date

Amount

July 30, 2017

\) 900,000

January 30, 2018

1,500,000

May 30, 2018

1,600,000

Total payments

\(4,000,000

Construction was completed and the building was ready for occupancy on May 27, 2018. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year

10%, 5-year note payable of \)2,000,000, dated April 1, 2014, with interest payable annually on April 1.

12%, 10-year bond issue of $3,000,000 sold at par on June 30, 2010, with interest payable annually on June 30.

The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.

Instructions

  1. Compute the weighted-average accumulated expenditures on Laserwords鈥� new building during the capitalization period.
  2. Compute the avoidable interest on Laserwords鈥� new building. (Round to one decimal place.)
  3. Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2018.
    1. Identify the items relating to interest costs that must be disclosed in Laserwords鈥� financial statements.
    2. Compute the amount of each of the items that must be disclosed.

Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of \(315,000. The estimated fair values of the assets are land \)60,000, building \(220,000, and equipment \)80,000. At what amounts should each of the three assets be recorded?

(Treatment of Various Costs) Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company鈥檚 fee for title search

\( 520

Architect鈥檚 fees

3,170

Cash paid for land and dilapidated building thereon

87,000

Removal of old building \)20,000

Less: Salvage 5,500

14,500

Interest on short-term loans during construction

7,400

Excavation before construction for basement

19,000

Machinery purchased (subject to 2% cash

discount, which was not taken)

55,000

Freight on machinery purchased

1,340

Storage charges on machinery, necessitated

by noncompletion of building when

machinery was delivered

2,180

New building constructed (building

construction took 6 months from date

of purchase of land and old building)

485,000

Assessment by city for drainage project

1,600

Hauling charges for delivery of machinery

from storage to new building

620

Installation of machinery

2,000

Trees, shrubs, and other landscaping

after completion of building

5,400

Instructions

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
  2. What are the objectives for capitalizing interest?
  3. Discuss which assets qualify for interest capitalization.
  4. Is there a limit to the amount of interest that may be capitalized in a period?
  5. If interest capitalization is allowed, what disclosures are required?

(Disposition of Assets) On April 1, 2017, Gloria Estefan Company received a condemnation award of \(430,000 cash as compensation for the forced sale of the company鈥檚 land and building, which stood in the path of a new state highway. The land and building cost \)60,000 and \(280,000, respectively, when they were acquired. At April 1, 2017, the accumulated depreciation relating to the building amounted to \)160,000. On August 1, 2017, Estafan purchased a piece of replacement property for cash. The new land cost \(90,000, and the new building cost \)400,000.

Instructions

Prepare the journal entries to record the transactions on April 1 and August 1, 2017.
See all solutions

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