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Chapter 10: Q20E (page 539)

(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.

Short Answer

Expert verified
  1. The cost of new equipment is $56,900
  2. The basis of new equipment is $51,100

Step by step solution

01

Meaning of Acquisition of cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

02

(a) Preparing journal entry

The exchange has commercial substance

Date

Particular

Debit ($)

Credit ($)

Equipment

56,900

Accumulated Depreciation-Equipment

20,000

Gain on Disposal of Equipment

5,800

Equipment

62,000

Cash

9,100

Working notes:

Calculation of Valuation of equipment

Cash

$ 8,000

Installation cost

1,100

The market value of used equipment

47,800

Cost of new equipment

$56,900

Computation of gain

The fair value of an old asset

$47,800

Cost of old asset $62,000

Less: Accumulated depreciation 20,000

Book value of the old asset

(42,000)

Gain on disposal of equipment

$ 5,800

03

(b) Preparing journal entry

Fair value information is not determinable

Date

Particular

Debit ($)

Credit ($)

Equipment

51,100

Accumulated Depreciation-Equipment

20,000

Equipment

62,000

Cash

9,100

Working notes:

Basis of new equipment

Book value of old equipment

$42,000

Cash paid (including installation costs)

9,100

Basis of new equipment

$51,100

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Most popular questions from this chapter

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life

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.

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.

(Treatment of Various Costs) Ben Sisko Supply Company, a newly formed corporation, incurred the following expenditures related to Land, to Buildings, and to Machinery and Equipment.

Abstract company鈥檚 fee for title search

\( 520

Architect鈥檚 fees

3,170

Cash paid for land and dilapidated building thereon

87,000

Removal of old building \)20,000

Less: Salvage 5,500

14,500

Interest on short-term loans during construction

7,400

Excavation before construction for basement

19,000

Machinery purchased (subject to 2% cash

discount, which was not taken)

55,000

Freight on machinery purchased

1,340

Storage charges on machinery, necessitated

by noncompletion of building when

machinery was delivered

2,180

New building constructed (building

construction took 6 months from date

of purchase of land and old building)

485,000

Assessment by city for drainage project

1,600

Hauling charges for delivery of machinery

from storage to new building

620

Installation of machinery

2,000

Trees, shrubs, and other landscaping

after completion of building

5,400

Instructions

Determine the amounts that should be debited to Land, to Buildings, and to Machinery and Equipment. Assume the benefits of capitalizing interest during construction exceed the cost of implementation. Indicate how any costs not debited to these accounts should be recorded.

(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.
See all solutions

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