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Chapter 10: Q19E (page 539)

(Nonmonetary Exchange) Carlos Arruza Company exchanged equipment used in its manufacturing operations plus \(3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.

Carlos Arruza Co.

Tony LoBianco Co.

Equipment (cost)

\)28,000

$28,000

Accumulated depreciation

19,000

10,000

Fair value of equipment

12,500

15,500

Cash given up

3,000

Instructions

  1. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
  2. Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.

Short Answer

Expert verified

Carlos Arruza

Tony Lo Bianco

(a)

Accumulated depreciation

$19,000

$10,000

(b)

Equipment cost

$15,500

$12,500

Step by step solution

01

Meaning of Commercial Substance

When a business's future cash flow changes due to a business entity's transaction, a commercial substance exists in that transaction

02

(a) Preparing journal entries

Exchange lacks commercial substance.

Carlos Arruza Company:

Date

Particular

Debit ($)

Credit ($)

Equipment

12,000

Accumulated Depreciation-Equipment

19,000

Equipment

28,000

Cash

3,000

Working notes:

Calculating Valuation of equipment

Book value of equipment given up

$ 9,000

Add: Cash paid

3,000

New equipment

$12,000

Calculation of gain on disposal

The fair value of old equipment

$12,500

Less: Book value of old equipment

9,000

Gain on disposal

$ 3,500

Note: The gain is delayed since the cash paid is less than 25% of the entire amount given up, and the transaction is nonmonetary.

Tony Lo Bianco Company:

Date

Particular

Debit ($)

Credit ($)

Cash

3,000

Equipment

12,500

Accumulated Depreciation-Equipment

10,000

Loss on Disposal of Equipment

2,500

Equipment

28,000

Calculation of Loss on disposal of equipment

Computation of loss

Book value of old equipment

$18,000

Less: Fair value of old equipment

15,500

Loss on disposal of equipment

$ 2,500

03

(b) Preparing journal entries

The exchange has commercial substance

Carlos Arruza Company

Date

Particular

Debit ($)

Credit ($)

Equipment

15,500

Accumulated Depreciation-Equipment

19,000

Equipment

28,000

Cash

3,000

Gain on Disposal of Equipment

3,500

Calculation of Cost of new equipment

Cost of new equipment

Cash paid

$3,000

The fair value of old equipment

12,500

Cost of new equipment

$15,500

Computation of gain on disposal of equipment:

The fair value of old equipment

$12,500

Less: Book value of old equipment($28,000-$19,000)

9,000

Gain on disposal of equipment

$ 3,500

Tony LoBianco Company

Date

Particular

Debit ($)

Credit ($)

Cash

3,000

Equipment

12,500

Accumulated Depreciation-Equipment (Old)

10,000

Loss on Disposal of Equipment

2,500

Equipment

28,000

Working notes:

Calculation of Cost of new equipment

The fair value of equipment

$15,500

Less: Cash received

3,000

Cost of new equipment

$12,500

Computation of loss on disposal of equipment

Book value of old equipment ($28,000-$10,000)

$18,000

Less: Fair value of the equipment (Old)

15,500

Loss on disposal of equipment

$ 2,500

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Most popular questions from this chapter

(Nonmonetary Exchange) Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of \(8,000 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid \)8,000 cash and traded in used equipment. The used equipment had originally cost \(62,000; it had a book value of \)42,000 and a secondhand fair value of \(47,800, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of \)1,100.

Instructions

  1. Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
  2. Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable, prepare the general journal entry to record this transaction.

(Analysis of Subsequent Expenditures) King Donovan 91影视 Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company鈥檚 plant asset book value is currently \(800,000, as indicated below.

Original cost

\)1,200,000

Accumulated depreciation

400,000

Book value

\( 800,000

The following expenditures were made to the plant facility during the current year.

  1. Because of increased demand for its product, the company increased its plant capacity by building a new addition at \)270,000.
  2. The entire plant was repainted at a cost of \(23,000.
  3. The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of \)61,000. Book value of the old roof was \(41,000.
  4. The electrical system was completely updated at a cost of \)22,000. The cost of the old electrical system was not known. It is estimated that the useful life of the building will not change as a result of this updating.
  5. A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.

Instructions

Indicate how each of these transactions would be recorded in the accounting records.

Question: What are the major characteristics of plant assets?

Question: Schwartzkopf Co. purchased for \(2,200,000 property that included both land and a building to be used in operations. The seller鈥檚 book value was \)300,000 for the land and \(900,000 for the building. By appraisal, the fair value was estimated to be \)500,000 for the land and $2,000,000 for the building. At what amount should Schwartzkopf report the land and the building at the end of the year?.

(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.
See all solutions

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