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Chapter 10: Q12BE. (page 532)

Slaton Corporation traded a used truck for a new truck. The used truck cost \(20,000 and has accumulated depreciation of \)17,000. The new truck is worth \(35,000. Slaton also made a cash payment of \)33,000. Prepare Slaton鈥檚 entry to record the exchange. (The exchange has commercial substance.)

Short Answer

Expert verified

The new truck would be recorded at $35,000 with a loss on the exchange of $1,000.

Step by step solution

01

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

Fairvalueoftheoldtruck=Fairvalueofthenewtruck-Cashpaid=$35,000-$33,000=$2,000


Gain/Lossonexchange=Fairvalueoftheoldtruck-Bookvalueofoldtruck=$2,000-($20,000-$17,000)=-$1,000

02

Journal entry

As the exchange has commercial substance, the loss would be recorded immediately.

Journal entry

Date

Description

Debit

Credit

New Truck

$35,000

Accumulated Depreciation

$17,000

Loss on exchange

$1,000

Old Truck

$20,000

Cash Paid

$33,000

Being an old truck exchanged for a new truck having commercial substance

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Most popular questions from this chapter

(Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of \(940,000. The original cost and related accumulated depreciation at this date are as follows.

Machine

\)1,300,000

Less: Accumulated depreciation

360,000

Book value

\( 940,000

Depreciation is computed at \)60,000 per year on a straight-line basis.

Instructions

Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.

  1. A fire completely destroys the machine on August 31, 2018. An insurance settlement of \(430,000 was received for this casualty. Assume the settlement was received immediately.
  2. On April 1, 2018, Tritt sold the machine for \)1,040,000 to Dwight Yoakam Company.
  3. On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.

Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were \(1,800,000 on March 1, \)1,200,000 on June 1, and $3,000,000 on December 31. Compute Hanson鈥檚 weighted-average accumulated expenditures for interest capitalization purposes.

(Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Assets 1 and 2: These assets were purchased as a lump sum for \(100,000 cash. The following information was gathered.

Description

Initial Cost on Seller鈥檚 Books

Depreciation to Date on Seller鈥檚 Books

Book Value on Seller鈥檚 Books

Appraised value

Machinery

\)100,000

\(50,000

\)50,000

\(90,000

Equipment

60,000

10,000

50,000

30,000

Asset 3: This machine was acquired by making a \)10,000 down payment and issuing a \(30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two \)15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for \(35,900.

Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.

Cost of machinery traded

\)100,000

Accumulated depreciation to date of sale

40,000

Fair value of machinery traded

80,000

Cash received

10,000

Fair value of machinery acquired

70,000

Asset 5: Equipment was acquired by issuing 100 shares of \(8 par value common stock. The stock had a market price of \)11 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of \(150,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.

Date

Payment

2/1

\)120,000

6/1

360,000

9/1

480,000

11/1

100,000

To finance construction of the building, a \(600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had \)200,000 of other outstanding debt during the year at a borrowing rate of 8%.

Instructions

Record the acquisition of each of these assets.

(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.

(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.
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