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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

(Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements,

and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.

(a) Money borrowed to pay building contractor (signed a note) \((275,000)

(b) Payment for construction from note proceeds 275,000

(c) Cost of land fill and clearing 8,000

(d) Delinquent real estate taxes on property assumed by purchaser 7,000

(e) Premium on 6-month insurance policy during construction 6,000

(f) Refund of 1-month insurance premium because construction completed early (1,000)

(g) Architect鈥檚 fee on building 22,000

(h) Cost of real estate purchased as a plant site (land \)200,000 and building $50,000) 250,000

(i) Commission fee paid to real estate agency 9,000

(j) Installation of fences around property 4,000

(k) Cost of razing and removing building 11,000

(l) Proceeds from salvage of demolished building (5,000)

(m) Interest paid during construction on money borrowed for construction 13,000

(n) Cost of parking lots and driveways 19,000

(o) Cost of trees and shrubbery planted (permanent in nature) 14,000

(p) Excavation costs for new building 3,000

Instructions

Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be

reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.

Item Land Land Improvements Buildings Other Accounts

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.

Question: Provide examples of assets that do not qualify for interest capitalization

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?

New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month鈥檚 wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.
See all solutions

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