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Chapter 10: Q8P (page 545)

(Nonmonetary Exchanges) Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry.

  1. Dorsett Company offered to exchange a similar machine plus \(23,000. (The exchange has commercial substance for both parties.)
  2. Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.)
  3. Liston Company offered to exchange a similar machine, but wanted \)3,000 in addition to Holyfield鈥檚 machine. (The exchange has commercial substance for both parties.)

In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay \(93,000 in addition to trading in its old machine.

Holyfield

Dorsett

Winston

Liston

Greeley

Machine cost

\)160,000

\(120,000

\)152,000

\(160,000

\)130,000

Accumulated depreciation

60,000

45,000

71,000

75,000

鈥�0鈥�

Fair value

92,000

69,000

92,000

95,000

185,000

Instructions

For each of the four independent situations, prepare the journal entries to record the exchange on the books of each company.

Short Answer

Expert verified
  1. Holyfield corporation- loss on disposal machinery =$8,000
  2. Dorsett- loss on disposal machinery =$6,000
  3. Winston-gain deferred = $11,000
  4. Liston- gain on disposal of machinery =$10,000
  5. Greely-sales revenue =$185,000

Step by step solution

01

Meaning of Non-Interest Bearing Liabilities

Journal entry refers to recording business transactions in the books of accounts in the manner in which the transactions occurred.

02

Step 2:Preparing journal entries

In the books of HolyfieldCorporation

Date

Particulars

Debit ($)

Credit ($)

Cash

23,000

Machinery

69,000

Accumulated Depreciation-Machinery

60,000

Loss on Disposal of Machinery

8,000

Machinery

160,000

Working notes:

Computation of loss on disposal of machinery

Computation of loss: Book value$160,000-$60,000

$100,000

Less: Fair value

92,000

Loss

$ 8,000

In the books of the Dorsett Company

Date

Particulars

Debit ($)

Credit ($)

Machinery

92,000

Accumulated Depreciation-Machinery

45,000

Loss on Disposal of Machinery

6,000

Cash

23,000

Machinery

120,000

Working notes:

Computation of loss on disposal of machinery

Computation of loss: Book value$120,000-$45,000

$75,000

Less: Fair value

69,000

Loss

$ 6,000

03

Preparing journal entries

In the books of HolyfieldCorporation

Date

Particulars

Debit ($)

Credit ($)

Machinery

92,000

Accumulated Depreciation-Machinery

60,000

Loss on Disposal of Machinery

8,000

Machinery

160,000

In the books of the Winston Company

Date

Particulars

Debit ($)

Credit ($)

Machinery($92,000-$11,000)

81,000

Accumulated Depreciation-Machinery

71,000

Machinery

152,000

Working notes:

Computation of gain deferred:

Fair value

$92,000

Less: Book value($152,000-$71,000)

81,000

Gain deferred

$11,000

04

Preparing journal entries

In the books of HolyfieldCorporation

Date

Particulars

Debit ($)

Credit ($)

Machinery

95,000

Accumulated Depreciation-Machinery

60,000

Loss on Disposal of Machinery

8,000

Machinery

160,000

Cash

3,000

In the books of the Liston Company

Date

Particulars

Debit ($)

Credit ($)

Machinery

92,000

Accumulated Depreciation-Machinery

75,000

Cash

3,000

Machinery

160,000

Gain on Disposal of Machinery

10,000

Working notes:

Computation of gain on disposal of machinery

Fair value

$ 95,000

Less: Book value

85,000

Gain

$ 10,000

Note:The whole gain should be recorded since the trade has commercial value.

05

Preparing journal entries

In the books of HolyfieldCorporation

Date

Particulars

Debit ($)

Credit ($)

Machinery

185,000

Accumulated Depreciation-Machinery

60,000

Loss on Disposal of Machinery

8,000

Machinery

160,000

Cash

93,000

In the books of the Greeley Company

Date

Particulars

Debit ($)

Credit ($)

Cash

93,000

Inventory

92,000

Sales Revenue

185,000

Cost of Goods Sold

130,000

Inventory

130,000

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Most popular questions from this chapter

What are the general rules for how gains or losses on retirement of plant assets should be reported in income?

Martin Buber Co. purchased land as a factory site for \(400,000. The process of tearing down two old buildings on the site and constructing the factory required 6 months. The company paid \)42,000 to raze the old buildings and sold salvaged lumber and brick for \(6,300. Legal fees of \)1,850 were paid for title investigation and drawing the purchase contract. Martin Buber paid \(2,200 to an engineering firm for a land survey, and \)68,000 for drawing the factory plans. The land survey had to be made before definitive plans could be drawn. Title insurance on the property cost \(1,500, and a liability insurance premium paid during construction was \)900. The contractor鈥檚 charge for construction was \(2,740,000. The company paid the contractor in two installments: \)1,200,000 at the end of 3 months and \(1,540,000 upon completion. Interest costs of \)170,000 were incurred to finance the construction. Instructions Determine the cost of the land and the cost of the building as they should be recorded on the books of Martin Buber Co. Assume that the land survey was for the building.

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.

(Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath鈥檚 controller, review the following transactions.

Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a \(28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of \)425 and installation costs of \(500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below.

Future value of \)1 for 4 periods

1.46

Future value of an ordinary annuity for 4 periods

4.64

Present value of \(1 for 4 periods

0.68

Present value of an ordinary annuity for 4 periods

3.17

Transaction 2: On December 1, 2017, Klamath Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to \)220,000 and included the assets listed below. Klamath Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.

Yakima Book Value

Fair Value

Inventory

\( 60,000

\) 50,000

Land

40,000

80,000

Buildings

70,000

120,000

\(170,000

\)250,000

During its fiscal year ended May 31, 2018, Klamath incurred \(8,000 for interest expense in connection with the financing of these assets.

Transaction 3: On March 1, 2018, Klamath Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Klamath intends to use the land for a parking lot. The trucks had a combined book value of \)35,000, as Klamath had recorded \(20,000 of accumulated depreciation against these assets. Klamath鈥檚 purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of \)46,000 at the time of the transaction. In addition to the trucks, Klamath Company paid $19,000 cash for the land.

Instructions

  1. Plant assets such as land, buildings, and equipment receive special accounting treatment. Describe the major characteristics of these assets that differentiate them from other types of assets.
  2. For each of the three transactions described above, determine the value at which Klamath Company should record the acquired assets. Support your calculations with an explanation of the underlying rationale.
  3. The books of Klamath Company show the following additional transactions for the fiscal year ended May 31, 2018.
    1. Acquisition of a building for speculative purposes.
    2. Purchase of a 2-year insurance policy covering plant equipment.
    3. Purchase of the rights for the exclusive use of a process used in the manufacture of ballet shoes.

For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.

(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.
See all solutions

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