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Chapter 10: Q17E (page 538)

(Nonmonetary Exchange) Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus \(340 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.

Busytown Corp.

(Old Machine)

Dick Tracy Co.

(New Machine)

Machine cost

\)290

$270

Accumulated depreciation

140

0

Fair Value

85

425

Instructions

For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)

Short Answer

Expert verified
  1. In Busytown Corporation, Accumulated depreciation is $140
  2. In Dick Tracy Company, sales revenue is $425

Step by step solution

01

Meaning of Journal

Journal refers to recording business transactions in the manner in which they occurred.

02

Preparing journal entries for Busytown Corp.

Date

Particular

Debit ($)

Credit ($)

Machinery

425

Accumulated Depreciation-Machinery

140

Loss on Disposal of Machinery

65

Machinery

290

Cash

340

Working notes:

Computation of loss

Book value of old machine($290-$140)

$150

Less: Fair value of old machine

85

Loss on disposal of machinery

$ 65

03

Preparing journal entries for Dick Tracy Co.

Date

Particular

Debit ($)

Credit ($)

Cash

340

Inventory

85

Cost of Goods Sold

270

Sales Revenue

425

Inventory

270

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Most popular questions from this chapter

(Dispositions, Including Condemnation, Demolition, and Trade-In) Presented below is a schedule of property dispositions for Hollerith Co.

Schedule of Property Dispositions

Cost

Accumulated Depreciation

Cash

Proceeds

Fair Value

Nature of Disposition

Land

\(40,000

鈥�

\)31,000

\(31,000

Condemnation

Building

15,000

鈥�

3,600

鈥�

Demolition

Warehouse

70,000

\)16,000

74,000

74,000

Destruction by fire

Machine

8,000

2,800

900

7,200

Trade-in

Furniture

10,000

7,850

鈥�

3,100

Contribution

Automobile

9,000

3,460

2,960

2,960

Sale

The following additional information is available.

Land: On February 15, a condemnation award was received as consideration for unimproved land held primarily as an investment, and on March 31, another parcel of unimproved land to be held as an investment was purchased for \(35,000.

Building: On April 2, land and building were purchased at a total cost of \)75,000, of which 20% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of November. Cash proceeds received in November represent the net proceeds from demolition of the building.

Warehouse: On June 30, the warehouse was destroyed by fire. The warehouse was purchased January 2, 2014, and had depreciated \(16,000. On December 27, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of \)90,000.

Machine: On December 26, the machine was exchanged for another machine having a fair value of \(6,300 and cash of \)900 was received. (The exchange lacks commercial substance.)

Furniture: On August 15, furniture was contributed to a qualified charitable organization. No other contributions were made or pledged during the year.

Automobile: On November 3, the automobile was sold to Jared Winger, a stockholder.

Instructions

Indicate how these items would be reported on the income statement of Hollerith Co.

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?

Question: Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets. (a) Land. (b) Machinery and equipment. (c) Buildings

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.)

Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker鈥檚 commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects鈥� fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair鈥檚 weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

  1. Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
  2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.
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