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Chapter 10: Q12Q (page 530)

Question: Discuss the basic accounting problem that arises in handling each of the following situations. (a) Assets purchased by issuance of common stock. (b) Acquisition of plant assets by gift or donation. (c) Purchase of a plant asset subject to a cash discount. (d) Assets purchased on a long-term credit basis. (e) A group of assets acquired for a lump sum. (f) An asset traded in or exchanged for another asset.

Short Answer

Expert verified

Answer

Basis accounting problem that arises in each situation is related to the valuation of the assets purchased. Each situation is related to at which cost asset is recorded in the books.

Step by step solution

01

Purchase of asset by issue of common stock

Accounting problem in case of purchase of asset by issue of common stock is arises to determine the value of asset. In this case, value of asset is not based on the par value of the common stock. Company uses the market value of stock to determine the value of the property.

02

Plant asset acquired in form of gift or donation

Company did not pay any price when plant asset is acquired by gift or donation. So, accounting problem of valuation of asset arises. In this case, fair value of the asset is used.

03

Plant asset purchased on cash discount

Plant asset purchased at cash discount arise the problem of treatment of cash discount. Whether cash discount is subtracted from the total cost or not. Both the treatments are used by the accountants.

04

Asset purchased on long term credit

When asset is purchased by the company on the credit which is payable in more than one accounting period. Then the problem of recording of asset arises. So, company record the asset at present value of consideration exchanged.

05

Purchase at lump sum

Company purchases more than one asset by paying a single price for all of them. In this case, allocation of cost among all assets is the major problem. So, accountant allocate the cost on fair value basis.

06

Exchange of asset for new asset

In this case, problem of recording of new asset arises. So, accountant record the asset at the fair value of the new asset.

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Most popular questions from this chapter

Durler Company purchased equipment on January 2, 2013, for \(112,000. The equipment had an estimated useful life of 5 years with an estimated salvage value of \)12,000. Durler uses straight-line depreciation on all assets. On January 2, 2017, Durler exchanged this equipment plus \(12,000 in cash for newer equipment. The old equipment has a fair value of \)50,000.

Accounting

Prepare the journal entry to record the exchange on the books of Durler Company. Assume that the exchange has commercial substance.

Analysis

How will this exchange affect comparisons of the return on asset ratio for Durler in the year of the exchange compared to prior years?

Principles

How does the concept of commercial substance affect the accounting and analysis of this exchange?

(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.

(Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.

List price of new melter

\(15,800

Cash paid

10,000

Cost of old melter (5-year life, \)700 salvage value)

11,200

Accumulated depreciation鈥攐ld melter (straight-line)

6,300

Secondhand fair value of old melter

5,200

Instructions

Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange

  1. has commercial substance, and
  2. lacks commercial substance. Cannondale鈥檚 fiscal year ends on December 31, and depreciation has been recorded through December 31, 2016.

Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.

(Capitalization of Interest) On July 31, 2017, Amsterdam Company engaged Minsk Tooling Company to construct a special-purpose piece of factory machinery. Construction was begun immediately and was completed on November 1, 2017. To help finance construction, on July 31 Amsterdam issued a \(300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. \)200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On November 1, Amsterdam made a final \(100,000 payment to Minsk. Other than the note to Netherlands, Amsterdam鈥檚 only outstanding liability at December 31, 2017, is a \)30,000, 8%, 6-year note payable, dated January 1, 2014, on which interest is payable each December 31.

Instructions

(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2017. (Round all computations to the nearest dollar.)

(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.

(1) July 31, 2017.

(2) November 1, 2017.

(3) December 31, 2017.
See all solutions

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