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Chapter 10: Q18E (page 539)

(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.

Short Answer

Expert verified
  1. Accumulated depreciation is $7,000
  2. Accumulated depreciation-Equipment $7,000

Step by step solution

01

Meaning of Commercial Substance

Due to a business entity's transaction, there will be a change in the business's future cash flow; that particular transaction has a commercial substance.

02

(a) Preparing journal entries

The exchange has commercial substance:

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

700

Accumulated Depreciation

Equipment

700

(To record depreciation expense)

Working notes:

Accumulateddepreciation=Costofoldmeltor-SalvagevalueUsefullife脳MonthsinnumberMonthsinayear=$11,200-$7005脳412=$700

Date

Particular

Debit ($)

Credit ($)

Equipment

15,200

Accumulated Depreciation-Equipment

7,000

Gain on Disposal of Equipment

1,000

Equipment

11,200

Cash

10,000

(To record exchange of equipment)

Working notes:

Calculation of gain on disposable asset

Cost of the old asset

$11,200

Less: Accumulated depreciation ($6,300+$700)

7,000

Book value of the equipment (old)

4,200

Less: Fair value of the old asset

(5,200)

Gain on disposal of equipment

$ 1,000

Calculation of cost of new asset

Asset=Cashpaid+Fairvalueofoldasset=$10,000+$5,200=$15,200

03

(b) Preparing journal entries

Exchange lacks commercial substance:

Date

Particular

Debit ($)

Credit ($)

Depreciation Expense

700

Accumulated Depreciation

Equipment

700

(To record depreciation expense)

Equipment (melter)

15,200

Accumulated Depreciation-Equipment

7,000

Gain on Disposal of Equipment

1,000

Equipment

11,200

Cash

10,000

(To record exchange of equipment)

Working notes:

Calculation of cost of new asset

Asset=Cashpaid+Fairvalueofoldasset=$10,000+$5,200=$15,200

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Most popular questions from this chapter

Tones Company purchased a warehouse in a downtown district where land values are rapidly increasing. Gerald Carter, controller, and Wilma Ankara, financial vice president, are trying to allocate the cost of the purchase between the land and the building. Noting that depreciation can be taken only on the building, Carter favors placing a very high proportion of the cost on the warehouse itself, thus reducing taxable income and income taxes. Ankara, his supervisor, argues that the allocation should recognize the increasing value of the land, regardless of the depreciation potential of the warehouse. Besides, she says, net income is negatively impacted by additional depreciation and will cause the company鈥檚 stock price to go down.

Instructions

Answer the following questions.

  1. What stakeholder interests are in conflict?
  2. What ethical issues does Carter face?
  3. How should these costs be allocated?

Garcia Corporation purchased a truck by issuing an $80,000, 4-year, zero-interest-bearing note to Equinox Inc. The market rate of interest for obligations of this nature is 10%. Prepare the journal entry to record the purchase of this truck.

Fielder Company obtained land by issuing 2,000 shares of its \(10 par value common stock. The land was recently appraised at \)85,000. The common stock is actively traded at $40 per share. Prepare the journal entry to record the acquisition of the land.

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.

(Capitalization of Interest) The following three situations involve the capitalization of interest

Situation I: On January 1, 2017, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of \(4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2017, to finance the construction cost, Oksana Baiul borrowed \)4,000,000 payable in 10 annual installments of \(400,000, plus interest at the rate of 10%. During 2017, Oksana Baiul made deposit and progress payments totaling \)1,500,000 under the contract; the weighted average amount of accumulated expenditures was \(800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of \)250,000.

Instructions

What amount should Oksana Baiul report as capitalized interest at December 31, 2017?

Situation II: During 2017, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.

Interest Costs Incurred

Warehouse constructed for Ito鈥檚 own use

\(30,000

Special-order machine for sale to unrelated customer, produced according to customer鈥檚 specifications

9,000

Inventories routinely manufactured, produced on a repetitive basis

8,000

All of these assets required an extended period of time for completion.

Instructions

Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?

Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2017, Peggy Fleming borrowed \)10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2018, expenditures for the partially completed structure totaled \(7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to \)650,000 for the year.

Instructions

How much should be shown as capitalized interest on Peggy Fleming鈥檚 financial statements on April 30, 2018?
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