Chapter 10 Acquisition and Disposition of Property, Plant, and Equipment
1. What are the major characteristics of plant assets?
2. Mickelson Inc. owns land that it purchased on January 1,
2000, for $450,000. At December 31, 2014, its current value is $770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31,
2014, balance sheet? Explain.
3. Name the items, in addition to the amount paid to the former owner or contractor, that may properly be included as part of the acquisition cost of the following plant assets.
(b) Machinery and equipment.
4. Indicate where the following items would be shown on a balance sheet.
(a) A lien that was attached to the land when purchased.
(b) Landscaping costs.
(c) Attorney’s fees and recording fees related to purchasing land.
(d) Variable overhead related to construction of machinery.
(e) A parking lot servicing employees in the building.
(f) Cost of temporary building for workers during construction of building.
(g) Interest expense on bonds payable incurred during construction of a building.
(h) Assessments for sidewalks that are maintained by the city.
(i) The cost of demolishing an old building that was on the land when purchased.
5. Two positions have normally been taken with respect to the recording of fixed manufacturing overhead as an element of the cost of plant assets constructed by a company for its own use:
(a) It should be excluded completely.
(b) It should be included at the same rate as is charged to normal operations.
What are the circumstances or rationale that support or deny the application of these methods?
6. The Buildings account of Postera Inc. includes the following items that were used in determining the basis for depreciating the cost of a building.
(a) Organization and promotion expenses.
(b) Architect’s 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’s books and in its annual financial statements?
7. Burke Company has purchased two tracts of land. One tract will be the site of its new manufacturing plant, while the other is being purchased with the hope that it will be sold in the next year at a profit. How should these two tracts of land be reported in the balance sheet?
8. One financial accounting issue encountered when a company constructs its own plant is whether the interest cost on funds borrowed to finance construction should be capitalized and then amortized over the life of the assets constructed. What is the justification for capitalizing such interest?
9. Provide examples of assets that do not qualify for interest capitalization.
10. What interest rates should be used in determining the amount of interest to be capitalized? How should the amount of interest to be capitalized be determined?
11. How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?
12. Discuss the basic accounting problem that arises in handling each of the following situations.
(a) Assets purchased by issuance of common stock.
(b) Acquisition of plant assets by gift or donation.
(c) Purchase of a plant asset subject to a cash discount.
(d) Assets purchased on a long-term credit basis.
(e) A group of assets acquired for a lump sum.
(f) An asset traded in or exchanged for another asset.
13. Magilke Industries acquired equipment this year to be used in its operations. The equipment was delivered by the suppliers, installed by Magilke, and placed into operation.
Some of it was purchased for cash with discounts available for prompt payment. Some of it was purchased under longterm payment plans for which the interest charges approximated prevailing rates. What costs should Magilke capitalize for the new equipment purchased this year? Explain.
14. Schwartzkopf Co. purchased for $2,200,000 property that included both land and a building to be used in operations.
The seller’s 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?
15. Pueblo Co. acquires machinery by paying $10,000 cash and signing a $5,000, 2-year, zero-interest-bearing note payable. The note has a present value of $4,208, and Pueblo purchased a similar machine last month for $13,500. At what cost should the new equipment be recorded?
16. Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.
17. Crowe Company purchased a heavy-duty truck on July 1,
2011, for $30,000. It was estimated that it would have a useful life of 10 years and then would have a trade-in value of $6,000. The company uses the straight-line method. It was traded on August 1, 2015, for a similar truck costing $42,000; $16,000 was allowed as trade-in value (also fair value) on the old truck and $26,000 was paid in cash. A comparison of expected cash flows for the trucks indicates the exchange lacks commercial substance.
What is the entry to record the trade-in?
18. Once equipment has been installed and placed in operation, subsequent expenditures relating to this equipment are frequently thought of as repairs or general maintenance and, hence, chargeable to operations in the period in which the expenditure is made. Actually, determination of whether such an expenditure should be charged to operations or capitalized involves a much more careful analysis of the character of the expenditure. What are the factors that should be considered in making such a decision? Discuss fully.
19. What accounting treatment is normally given to the following items in accounting for plant assets?
(b) Major repairs.
(c) Improvements and replacements.
20. New machinery, which replaced a number of employees, was installed and put in operation in the last month of the fiscal year. The employees had been dismissed after payment of an extra month’s wages, and this amount was added to the cost of the machinery. Discuss the propriety of the charge. If it was improper, describe the proper treatment.
21. To what extent do you consider the following items to be proper costs of the fixed asset? Give reasons for your opinions.
(a) Overhead of a business that builds its own equipment.
(b) Cash discounts on purchases of equipment.
(c) Interest paid during construction of a building.
(d) Cost of a safety device installed on a machine.
(e) Freight on equipment returned before installation, for replacement by other equipment of greater capacity.
(f) Cost of moving machinery to a new location.
(g) Cost of plywood partitions erected as part of the remodeling of the office.
(h) Replastering of a section of the building.
(i) Cost of a new motor for one of the trucks.
22. Neville Enterprises has a number of fully depreciated assets that are still being used in the main operations of the business. Because the assets are fully depreciated, the president of the company decides not to show them on the balance sheet or disclose this information in the notes.
Evaluate this procedure.
23. What are the general rules for how gains or losses on retirement of plant assets should be reported in income?
BE10-1 Previn Brothers Inc. purchased land at a price of $27,000. Closing costs were $1,400. An old building was removed at a cost of $10,200. What amount should be recorded as the cost of the land?
BE10-2 Hanson Company is constructing a building. Construction began on February 1 and was completed on December 31. Expenditures were $1,800,000 on March 1, $1,200,000 on June 1, and $3,000,000 on
December 31. Compute Hanson’s weighted-average accumulated expenditures for interest capitalization purposes.
BE10-3 Hanson Company (see BE10-2) borrowed $1,000,000 on March 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 5-year, $2,000,000 note payable and an 11%, 4-year, $3,500,000 note payable. Compute the weighted-average interest rate used for interest capitalization purposes.
BE10-4 Use the information for Hanson Company from BE10-2 and BE10-3. Compute avoidable interest for Hanson Company.
BE10-5 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.
BE10-6 Mohave Inc. purchased land, building, and equipment from Laguna Corporation for a cash payment of $315,000. The estimated fair values of the assets are land $60,000, building $220,000, and equipment $80,000. At what amounts should each of the three assets be recorded?
BE10-7 Fielder Company obtained land by issuing 2,000 shares of its $10 par value common stock. The land was recently appraised at $85,000. The common stock is actively traded at $40 per share. Prepare the journal entry to record the acquisition of the land.
BE10-8 Navajo Corporation traded a used truck (cost $20,000, accumulated depreciation $18,000) for a small computer worth $3,300. Navajo also paid $500 in the transaction. Prepare the journal entry to record the exchange. (The exchange has commercial substance.)
BE10-9 Use the information for Navajo Corporation from BE10-8. Prepare the journal entry to record the exchange, assuming the exchange lacks commercial substance.
BE10-10 Mehta Company traded a used welding machine (cost $9,000, accumulated depreciation $3,000) for office equipment with an estimated fair value of $5,000. Mehta also paid $3,000 cash in the transaction.
Prepare the journal entry to record the exchange. (The exchange has commercial substance.)
BE10-11 Cheng Company traded a used truck for a new truck. The used truck cost $30,000 and has accumulated depreciation of $27,000. The new truck is worth $37,000. Cheng also made a cash payment of $36,000. Prepare Cheng’s entry to record the exchange. (The exchange lacks commercial substance.)
BE10-12 Slaton Corporation traded a used truck for a new truck. The used truck cost $20,000 and has accumulated depreciation of $17,000. The new truck is worth $35,000. Slaton also made a cash payment of $33,000. Prepare Slaton’s entry to record the exchange. (The exchange has commercial substance.)
BE10-13 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.
BE10-14 Ottawa Corporation owns machinery that cost $20,000 when purchased on July 1, 2011. 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, 2014. The machinery is sold on September 1, 2015, for $10,500. Prepare journal entries to (a) update depreciation for 2015 and (b) record the sale.
BE10-15 Use the information presented for Ottawa Corporation in BE10-14, but assume the machinery is sold for $5,200 instead of $10,500. Prepare journal entries to (a) update depreciation for 2015 and (b) record the sale.
E10-1 (Acquisition Costs of Realty) The following expenditures and receipts are related to land, land improvements, and buildings acquired for use in a business enterprise. The receipts are enclosed in parentheses.
(a) Money borrowed to pay building contractor (signed a note) $(275,000)
(b) Payment for construction from note proceeds 275,000
(c) Cost of land fill and clearing 8,000
(d) Delinquent real estate taxes on property assumed by purchaser 7,000
(e) Premium on 6-month insurance policy during construction 6,000
(f) Refund of 1-month insurance premium because construction completed early (1,000)
(g) Architect’s fee on building 22,000
(h) Cost of real estate purchased as a plant site (land $200,000 and building $50,000) 250,000
(i) Commission fee paid to real estate agency 9,000
(j) Installation of fences around property 4,000
(k) Cost of razing and removing building 11,000
(l) Proceeds from salvage of demolished building (5,000)
(m) Interest paid during construction on money borrowed for construction 13,000
(n) Cost of parking lots and driveways 19,000
(o) Cost of trees and shrubbery planted (permanent in nature) 14,000
(p) Excavation costs for new building 3,000
Identify each item by letter and list the items in columnar form, using the headings shown below. All receipt amounts should be reported in parentheses. For any amounts entered in the Other Accounts column, also indicate the account title.
E10-2 (Acquisition Costs of Realty) 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’s 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.
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.
E10-3 (Acquisition Costs of Trucks) Kelly Clarkson Corporation operates a retail computer store. To improve delivery services to customers, the company purchases four new trucks on April 1, 2014. The terms of acquisition for each truck are described below.
1. Truck #1 has a list price of $15,000 and is acquired for a cash payment of $13,900.
2. Truck #2 has a list price of $16,000 and is acquired for a down payment of $2,000 cash and a zerointerest- bearing note with a face amount of $14,000. The note is due April 1, 2015. Clarkson would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
3. Truck #3 has a list price of $16,000. It is acquired in exchange for a computer system that Clarkson carries in inventory. The computer system cost $12,000 and is normally sold by Clarkson for $15,200.
Clarkson uses a perpetual inventory system.
4. Truck #4 has a list price of $14,000. It is acquired in exchange for 1,000 shares of common stock in
Clarkson Corporation. The stock has a par value per share of $10 and a market price of $13 per share.
Prepare the appropriate journal entries for the above transactions for Clarkson Corporation.
E10-4 (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 2014.
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 fi rst year of operation on this equipment 1,500
Special plumbing fi xtures required for new equipment 8,000
Repair cost incurred in fi rst year of operations related to this equipment 1,300
Material and purchased parts (gross cost $200,000; failed to take 2% cash discount) $200,000
Imputed interest on funds used during construction (stock fi nancing) 14,000
Labor costs 190,000
Allocated overhead costs (fi xed—$20,000; variable—$30,000) 50,000
Profi t on self-construction 30,000
Cost of installing equipment 4,400
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.
E10-5 (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.
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.
E10-6 (Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.
1. Belanna Industries Inc. acquired land, buildings, and equipment from a bankrupt company, Torres
Co., for a lump-sum price of $700,000. At the time of purchase, Torres’s assets had the following book and appraisal values.
Book Values Appraisal Values
Land $200,000 $150,000
Buildings 250,000 350,000
Equipment 300,000 300,000
To be conservative, the company decided to take the lower of the two values for each asset acquired.
The following entry was made.
Abstract company’s fee for title search $ 520
Architect’s 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
(permanent in nature) 5,400
2. Harry Enterprises purchased store equipment by making a $2,000 cash down payment and signing a 1-year, $23,000, 10% note payable. The purchase was recorded as follows.
Notes Payable 23,000
Interest Payable 2,300
3. Kim Company purchased office equipment for $20,000, terms 2/10, n/30. Because the company intended to take the discount, it made no entry until it paid for the acquisition. The entry was:
Purchase Discounts 400
4. Kaisson Inc. recently received at zero cost land from the Village of Cardassia as an inducement to locate its business in the Village. The appraised value of the land is $27,000. The company made no entry to record the land because it had no cost basis.
5. Zimmerman Company built a warehouse for $600,000. It could have purchased the building for $740,000. The controller made the following entry.
Profit on Construction 140,000
Prepare the entry that should have been made at the date of each acquisition.
E10-7 (Capitalization of Interest) Harrisburg Furniture Company started construction of a combination office and warehouse building for its own use at an estimated cost of $5,000,000 on January 1, 2014.
Harrisburg expected to complete the building by December 31, 2014. Harrisburg has the following debt obligations outstanding during the construction period.
Construction loan—12% interest, payable semiannually, issued
December 31, 2013 $2,000,000
Short-term loan—10% interest, payable monthly, and principal payable at maturity on May 30, 2015 1,400,000
Long-term loan—11% interest, payable on January 1 of each year. Principal payable on January 1, 2018 1,000,000
(Carry all computations to two decimal places.)
(a) Assume that Harrisburg completed the office and warehouse building on December 31, 2014, as planned at a total cost of $5,200,000, and the weighted-average amount of accumulated expenditures was $3,600,000. Compute the avoidable interest on this project.
(b) Compute the depreciation expense for the year ended December 31, 2015. Harrisburg elected to depreciate the building on a straight-line basis and determined that the asset has a useful life of 30 years and a salvage value of $300,000.
E10-8 (Capitalization of Interest) On December 31, 2013, Main Inc. borrowed $3,000,000 at 12% payable annually to finance the construction of a new building. In 2014, 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 2015. Additional information is provided as follows.
1. Other debt outstanding
10-year, 13% bond, December 31, 2007, interest payable annually $4,000,000
6-year, 10% note, dated December 31, 2011, interest payable annually $1,600,000
2. March 1, 2014, expenditure included land costs of $150,000
3. Interest revenue earned in 2014 $49,000
(a) Determine the amount of interest to be capitalized in 2014 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, if any, at December 31, 2014.
E10-9 (Capitalization of Interest) On July 31, 2014, Amsterdam Company engaged Minsk Tooling
Company to construct a special-purpose piece of factory machinery. Construction was begun immediately
and was completed on November 1, 2014. To help finance construction, on July 31 Amsterdam issued a $300,000, 3-year, 12% note payable at Netherlands National Bank, on which interest is payable each July 31. $200,000 of the proceeds of the note was paid to Minsk on July 31. The remainder of the proceeds was temporarily invested in short-term marketable securities (trading securities) at 10% until November 1. On
November 1, Amsterdam made a final $100,000 payment to Minsk. Other than the note to Netherlands,
Amsterdam’s only outstanding liability at December 31, 2014, is a $30,000, 8%, 6-year note payable, dated
January 1, 2011, on which interest is payable each December 31.
(a) Calculate the interest revenue, weighted-average accumulated expenditures, avoidable interest, and total interest cost to be capitalized during 2014. (Round all computations to the nearest dollar.)
(b) Prepare the journal entries needed on the books of Amsterdam Company at each of the following dates.
(1) July 31, 2014.
(2) November 1, 2014.
(3) December 31, 2014.
E10-10 (Capitalization of Interest) The following three situations involve the capitalization of interest.
Situation I: On January 1, 2014, Oksana Baiul, Inc. signed a fixed-price contract to have Builder Associates construct a major plant facility at a cost of $4,000,000. It was estimated that it would take 3 years to complete the project. Also on January 1, 2014, to finance the construction cost, Oksana Baiul borrowed $4,000,000 payable in 10 annual installments of $400,000, plus interest at the rate of 10%. During 2014,
Oksana Baiul made deposit and progress payments totaling $1,500,000 under the contract; the weightedaverage amount of accumulated expenditures was $800,000 for the year. The excess borrowed funds were invested in short-term securities, from which Oksana Baiul realized investment income of $250,000.
What amount should Oksana Baiul report as capitalized interest at December 31, 2014?
Situation II: During 2014, Midori Ito Corporation constructed and manufactured certain assets and incurred the following interest costs in connection with those activities.
Warehouse constructed for Ito’s own use $30,000
Special-order machine for sale to unrelated customer, produced according to customer’s specifi cations 9,000
Inventories routinely manufactured, produced on a repetitive basis 8,000
All of these assets required an extended period of time for completion.
Assuming the effect of interest capitalization is material, what is the total amount of interest costs to be capitalized?
Situation III: Peggy Fleming, Inc. has a fiscal year ending April 30. On May 1, 2014, Peggy Fleming borrowed $10,000,000 at 11% to finance construction of its own building. Repayments of the loan are to commence the month following completion of the building. During the year ended April 30, 2015, expenditures for the partially completed structure totaled $7,000,000. These expenditures were incurred evenly throughout the year. Interest earned on the unexpended portion of the loan amounted to $650,000 for the year.
How much should be shown as capitalized interest on Peggy Fleming’s financial statements at April 30, 2015?
E10-11 (Entries for Equipment Acquisitions) Jane Geddes Engineering Corporation purchased conveyor equipment with a list price of $10,000. Presented below are three independent cases related to the equipment.
(Round to the nearest dollar.)
(a) Geddes paid cash for the equipment 8 days after the purchase. The vendor’s credit terms are 2/10, n/30. Assume that equipment purchases are initially recorded gross.
(b) Geddes traded in equipment with a book value of $2,000 (initial cost $8,000), and paid $9,500 in cash one month after the purchase. The old equipment could have been sold for $400 at the date of trade.
(The exchange has commercial substance.)
(c) Geddes gave the vendor a $10,800 zero-interest-bearing note for the equipment on the date of purchase.
The note was due in one year and was paid on time. Assume that the effective-interest rate in the market was 9%.
Prepare the general journal entries required to record the acquisition and payment in each of the independent cases above.
E10-12 (Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to
(a) The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be $81,000.
(b) 13,000 shares of common stock with a par value of $50 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of $810,000, of which $180,000 has been allocated to land and $630,000 to buildings. The stock of Duffner Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at $65 per share, and a block of 200 shares was sold by another stockholder 18 months ago at $58 per share.
(c) No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year.
The following information is given relative to costs of the machinery constructed.
Materials used $12,500
Factory supplies used 900
Direct labor incurred 15,000
Additional overhead (over regular) caused by construction 2,700 of machinery, excluding factory supplies used
Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost
Cost of similar machinery if it had been purchased from outside suppliers 44,000
Prepare journal entries on the books of Duffner Company to record these transactions.
E10-13 (Entries for Acquisition of Assets) Presented below is information related to Zonker Company.
1. On July 6, Zonker Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is:
Land $ 400,000
Zonker Company gave 12,500 shares of its $100 par value common stock in exchange. The stock had a market price of $168 per share on the date of the purchase of the property.
2. Zonker Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building.
Repairs to building $105,000
Construction of bases for equipment to be installed later 135,000
Driveways and parking lots 122,000
Remodeling of offi ce space in building, including new partitions and walls 161,000
Special assessment by city on land 18,000
3. On December 20, the company paid cash for equipment, $260,000, subject to a 2% cash discount, and freight on equipment of $10,500.
Prepare entries on the books of Zonker Company for these transactions.
E10-14 (Purchase of Equipment with Zero-Interest-Bearing Debt) Chippewas Inc. has decided to purchase equipment from Central Michigan Industries on January 2, 2014, to expand its production capacity to meet customers’ demand for its product. Chippewas issues an $800,000, 5-year, zero-interest-bearing note to Central Michigan for the new equipment when the prevailing market rate of interest for obligations of this nature is 12%. The company will pay off the note in five $160,000 installments due at the end of each year over the life of the note.
(Round to nearest dollar in all computations.)
(a) Prepare the journal entry(ies) at the date of purchase.
(b) Prepare the journal entry(ies) at the end of the first year to record the payment and interest, assuming that the company employs the effective-interest method.
(c) Prepare the journal entry(ies) at the end of the second year to record the payment and interest.
(d) Assuming that the equipment had a 10-year life and no salvage value, prepare the journal entry necessary to record depreciation in the first year. (Straight-line depreciation is employed.)
E10-15 (Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2013, for $105,000, paying $30,000 down and agreeing to pay the balance in five equal installments of $15,000 payable each December 31 beginning in 2014. An assumed interest rate of
10% is implicit in the purchase price.
(Round to two decimal places.)
(a) Prepare the journal entry(ies) at the date of purchase.
(b) Prepare the journal entry(ies) at December 31, 2014, to record the payment and interest (effectiveinterest method employed).
(c) Prepare the journal entry(ies) at December 31, 2015, to record the payment and interest (effectiveinterest method employed).
E10-16 (Asset Acquisition) Hayes Industries purchased the following assets and constructed a building as well. All this was done during the current year.
Assets 1 and 2: These assets were purchased as a lump sum for $100,000 cash. The following information was gathered.
Initial Cost on Date on Seller’s Book Value on
Description Seller’s Books Books Seller’s Books Appraised Value
Machinery $100,000 $50,000 $50,000 $90,000
Equipment 60,000 10,000 50,000 30,000
Asset 3: This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900.
Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.)
Facts concerning the trade-in are as follows.
Cost of machinery traded $100,000
Accumulated depreciation to date of sale 40,000
Fair value of machinery traded 80,000
Cash received 10,000
Fair value of machinery acquired 70,000
Asset 5: Equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market price of $11 per share.
Construction of Building: A building was constructed on land purchased last year at a cost of $150,000.
Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.
To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1.
The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%.
Record the acquisition of each of these assets.
E10-17 (Nonmonetary Exchange) Busytown Corporation, which manufactures shoes, hired a recent college graduate to work in its accounting department. On the first day of work, the accountant was assigned to total a batch of invoices with the use of an adding machine. Before long, the accountant, who had never before seen such a machine, managed to break the machine. Busytown Corporation gave the machine plus $340 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.
Busytown Corp. Dick Tracy Co.
(Old Machine) (New Machine)
Machine cost $290 $270
Accumulated depreciation 140 –0–
Fair value 85 425
For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)
E10-18 (Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30,
2014, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.
List price of new melter $15,800
Cash paid 10,000
Cost of old melter (5-year life, $700 salvage value) 11,200
Accumulated depreciation—old melter (straight-line) 6,300
Secondhand fair value of old melter 5,200
Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and (b) lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through December 31, 2013.
E10-19 (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
(a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
(b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.
E10-20 (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.
(a) Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
(b) 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.