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Chapter 10: Q9P (page 545)

(Nonmonetary Exchanges) On August 1, Hyde, Inc. exchanged productive assets with Wiggins, Inc. Hyde鈥檚 asset is referred to below as 鈥淎sset A,鈥� and Wiggins鈥� is referred to as 鈥淎sset B.鈥� The following facts pertain to these assets.

Asset A

Asset B

Original cost

\(96,000

\)110,000

Accumulated depreciation (to date of exchange)

40,000

47,000

Fair value at date of exchange

60,000

75,000

Cash paid by Hyde, Inc.

15,000

Cash received by Wiggins, Inc.

15,000

Instructions

  1. Assuming that the exchange of Assets A and B has commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.
  2. Assuming that the exchange of Assets A and B lacks commercial substance, record the exchange for both Hyde, Inc. and Wiggins, Inc. in accordance with generally accepted accounting principles.

Short Answer

Expert verified

S.no.

Transaction

Hyde, Inc.鈥檚

Wiggins, Inc.鈥檚

(a)

Gain on Disposal of Machinery

$4,000

$12,000

(b)

Gain

$4,000

$2,400

Step by step solution

01

Meaning of Accumulated Depreciation

Accumulated depreciation refers to thetotal amount of depreciation charged on the assetsfrom the acquisition date to the reporting date.

02

(a) Preparing journal entry

In the books of Hyde, Inc.鈥檚

Date

Particulars

Debit ($)

Credit ($)

Machinery (B)

75,000

Accumulated Depreciation-Machinery (A)

40,000

Machinery (A)

96,000

Gain on Disposal of Machinery

4,000

Cash

15,000

Working notes:

Calculating gain on disposal of machinery

Gainondisposalofmachinery=Fairvalue-(Originalcost-Accumulateddepreciation)=$60,000-($96,000-$40,000)=$4,000

In the books of Wiggins, Inc.鈥檚

Date

Particulars

Debit ($)

Credit ($)

Cash

15,000

Machinery (A)

60,000

Accumulated Depreciation-Machinery (B)

47,000

Machinery (B)

110,000

Gain on Disposal of Machinery

12,000

Working notes:

Calculating gain on disposal of machinery

Gainondisposalofmachinery=Fairvalue-(Originalcost-Accumulateddepreciation)=$75,000-($110,000-$47,000)=$12,000

03

(b) Preparing journal entry

In the books of Hyde, Inc.鈥檚

Date

Particulars

Debit ($)

Credit ($)

Machinery (B)($75,000-$4,000)

71,000

Accumulated Depreciation-Machinery (A)

40,000

Machinery (A)

96,000

Cash

15,000

Working notes:

Computation of gain deferred

Fair value

$60,000

Less: Book value($96,000-$40,000)

56,000

Gain deferred

$ 4,000

in the books of Wiggins, Inc.鈥檚

Date

Particulars

Debit ($)

Credit ($)

Cash

15,000

Machinery (A)

50,400

Accumulated Depreciation-Machinery (B)

47,000

Machinery (B)

110,000

Gain on Disposal of Machinery

2,400

Working notes:

Computation of total gain

The fair value of Asset B

$75,000

Less: Book value of Asset B

63,000

Gain on disposal of assets

$12,000

Calculation of gain recognized

Gainrecognized=CashCash+Fairvalue脳Gaindisposal=$15,000$15,000+$60,000脳$12,000=$2,400

Calculating basics of machinery A

The fair value of the asset acquired

$60,000

Less: Gain deferred($12,000-$2,400)

9,600

Basis of Machinery A

$50,400

Note:Itexemplifies the relaxation of the no gain or loss rule for trades with low economic value. Although it is unusual for a business to be devoid of commercial substance when cash is received, profit can be derived based on a percentage of cash received at full fair value.

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Most popular questions from this chapter

To what extent do you consider the following items to be proper costs of the fixed asset? Give reasons for your opinions.

  1. Overhead of a business that builds its own equipment.
  2. Cash discounts on purchases of equipment.
  3. Interest paid during the construction of a building.
  4. Cost of a safety device installed on a machine.
  5. Freight on equipment returned before installation, for replacement by other equipment of greater capacity.
  6. Cost of moving machinery to a new location.
  7. Cost of plywood partitions erected as part of the remodeling of the office.
  8. Replastering of a section of the building.
  9. Cost of a new motor for one of the trucks.

Question: The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.

Organization and promotion expenses. (b) Architect鈥檚 fees. (c) Interest and taxes during construction. (d) Interest revenue on investments held to fund construction of a building. Do you agree with these charges? If not, how would you deal with each of the items above in the corporation鈥檚 books and in its annual financial statements?

The invoice price of a machine is \(50,000. Various other costs relating to the acquisition and installation of the machine, including transportation, electrical wiring, special base, and so on amount to \)7,500. The machine has an estimated life of 10 years, with no salvage value at the end of that period.

The owner of the business suggests that the incidental costs of \(7,500 be charged to theexpense immediately for the following reasons.

  1. If the machine should be sold, these costs cannot be recovered in the sales price.
  2. The inclusion of the \)7,500 in the machinery account on the books will not necessarily result in a closer approximation of the market price of this asset over the years, because of the possibility of changing demand and supply levels.
  3. Charging the $7,500 to expense immediately will reduce federal income taxes.

Instructions

Discuss each of the points raised by the owner of the business.

Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker鈥檚 commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects鈥� fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair鈥檚 weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

  1. Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
  2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.

(Capitalization of Interest) On December 31, 2016, Main Inc. borrowed \(3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, \)360,000; June 1, \(600,000; July 1, \)1,500,000; December 1, \(1,500,000. The building was completed in February 2018. Additional information is provided as follows.

1. Other debt outstanding

10-year, 13% bond, December 31, 2010, interest payable annually \)4,000,000

6-year, 10% note, dated December 31, 2014, interest payable

annually \(1,600,000

2. March 1, 2017, expenditure included land costs of \)150,000

3. Interest revenue earned in 2017 $49,000

Instructions

(a) Determine the amount of interest to be capitalized in 2017 in relation to the construction of the building.

(b) Prepare the journal entry to record the capitalization of interest and the recognition of interest expense at December 31, 2017.
See all solutions

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