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Chapter 10: Problem 20

A printing press priced at \(\$ 315,000\) is acquired by trading in a similar press and paying cash for the difference between the trade-in allowance and the price of the new press. a. Assuming that the trade-in allowance is \(\$ 110,000\), what is the amount of cash given? b. Assuming that the book value of the press traded in is \(\$ 98,750\), what is the cost of the new press for financial reporting purposes?

Short Answer

Expert verified
a. Cash given is \( \$205,000 \). b. Cost for financial reporting is \( \$303,750 \).

Step by step solution

01

Calculate Cash Payment

To determine the cash given, subtract the trade-in allowance from the price of the new press. Given the new press price of \( \\(315,000 \) and the trade-in allowance of \( \\)110,000 \), the formula is:\[\text{Cash Payment} = \text{Price of New Press} - \text{Trade-in Allowance}\]Substituting the values, we get:\[\text{Cash Payment} = 315,000 - 110,000 = \$205,000\]
02

Determine Cost for Financial Reporting

The cost of the new press for financial reporting purposes includes the book value of the traded-in press plus any additional cash payment. Given the book value of \( \\(98,750 \), the formula to find the cost is:\[\text{Cost of New Press} = \text{Book Value of Traded Press} + \text{Cash Payment}\]Substituting the book value and cash payment calculated from Step 1:\[\text{Cost of New Press} = 98,750 + 205,000 = \\)303,750\]

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Trade-In Allowance
When you trade in an old asset as part of acquiring a new one, dealers often provide a trade-in allowance. This is the amount deducted from the price of the new item, as a credit for your old equipment. It serves to reduce the cash you need to pay.
In our example, the new printing press costs \( \\(315,000 \). With a trade-in allowance of \( \\)110,000 \), you only pay the remaining amount in cash. So, it's like using your old equipment to partially pay for the new one. This helps in minimizing the immediate cash layout required from the business.
  • Encourages upgrades by making them more affordable
  • Decreases initial costs, aiding cash flow management
Overall, a trade-in allowance is beneficial for companies wishing to upgrade their assets without a significant immediate monetary commitment.
Book Value
Book value represents the leftover value of an asset from an accounting perspective, after accounting for depreciation. It's essential when you use old equipment as part of a trade-in deal.
The book value of our traded press is \( \$98,750 \). This figure is crucial to understanding how much value is left in an existing asset. Let's break it down:
  • Book value helps determine overall asset worth on financial statements
  • Impacts decisions of selling versus trading in
For our transaction, the book value plus the cash payment combines to form the recorded cost of the new press.Understanding book value ensures accurate financial representation when assets are transferred or sold.
Financial Reporting
Financial reporting involves documenting transactions to show an accurate picture of a company's financial dealings. When acquiring new equipment, understanding how to record the transaction is vital.
The cost for financial reporting purposes considers both the book value of traded-in assets and any cash paid additionally.
  • Ensures accounting statements reflect fair value
  • Helps in providing consistent financial information
In our case, the cost for financial reporting purposes for the new printing press is \( \\(303,750 \). This:
  • Includes \( \\)98,750 \) book value of the old press
  • Adds \( \$205,000 \) cash payment
Such calculations ensure transparency and credibility in reporting financial assets and liabilities.

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Most popular questions from this chapter

Colmey Company acquired patent rights on January 3,2003 , for \(\$ 472,500\). The patent has a useful life equal to its legal life of 15 years. On January 5,2006 , Colmey successfully defended the patent in a lawsuit at a cost of \(\$ 75,000\). a. Determine the patent amortization expense for the current year ended December 31, \(2006 .\) b. Journalize the adjusting entry to recognize the amortization.

Ball-Peen Metal Casting Co. reported \(\$ 859,600\) for equipment and \(\$ 317,500\) for accumulated depreciation-equipment on its balance sheet. 1\. Does this mean (a) that the replacement cost of the equipment is \(\$ 859,600\) and (b) that \(\$ 317,500\) is set aside in a special fund for the replacement of the equipment? Explain.

Cristy Fleming owns and operates Quesenberry Print Co. During February, Quesenberry Print Co. incurred the following costs in acquiring two printing presses. One printing press was new, and the other was used by a business that recently filed for bankruptcy. Costs related to new printing press: 1\. Freight 2\. Special foundation 3\. Sales tax on purchase price 4\. Insurance while in transit 5\. Fee paid to factory representative for installation 6\. New parts to replace those damaged in unloading Costs related to secondhand printing press: 7\. Repair of vandalism during installation 8\. Replacement of worn-out parts 9\. Freight 10\. Installation 11\. Repair of damage incurred in reconditioning the press 12\. Fees paid to attorney to review purchase agreement a. Indicate which costs incurred in acquiring the new printing press should be debited to the asset account. b. Indicate which costs incurred in acquiring the secondhand printing press should be debited to the asset account.

Felix Little owns and operates Big Sky Transport Co. During the past year, Felix incurred the following costs related to his 18 -wheel truck. 1\. Replaced a headlight that had burned out. 2\. Removed the old CB radio and replaced it with a newer model with a greater range. 3\. Replaced a shock absorber that had worn out. 4\. Installed a television in the sleeping compartment of the truck. 5\. Replaced the old radar detector with a newer model that detects the KA frequencies now used by many of the state patrol radar guns. The detector is wired directly into the cab, so that it is partially hidden. In addition, Felix fastened the detector to the truck with a locking device that prevents its removal. 6\. Installed fog and cab lights. 7\. Installed a wind deflector on top of the cab to increase fuel mileage. 8\. Modified the factory-installed turbo charger with a special-order kit designed to add 50 more horsepower to the engine performance. 9\. Replaced the hydraulic brake system that had begun to fail during his latest trip through the Rocky Mountains. 10\. Overhauled the engine. Classify each of the costs as a capital expenditure or a revenue expenditure. For those costs identified as capital expenditures, classify each as anditional or replacement component.

Convert each of the following estimates of useful life to a straight-line depreciation rate, stated as a percentage, assuming that the residual value of the fixed asset is to be ignored: (a) 20 years, (b) 25 years, (c) 40 years, (d) 4 years, (e) 5 years, (f) 10 years, (g) 50 years.
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