Chapter 10: 1BE (page 502)
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.
$38,600 the prior
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
(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 2017.
Purchase
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 first year of operation 1,500
on this equipment
Special plumbing fixtures required for new equipment 8,000
Repair cost incurred in first year of operations related 1,300
to this equipment
Construction
Material and purchased parts (gross cost \(200,000;
failed to take 2% cash discount) \)200,000
Imputed interest on funds used during
construction (stock financing) 14,000
Labor costs 190,000
Allocated overhead costs (fixed—\(20,000;
variable—\)30,000) 50,000
Profit on self-construction 30,000
Cost of installing equipment 4,400
Instructions
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.
(Capitalization of Interest) Laserwords Inc. is a book distributor that had been operating in its original facility since 1987. The increase in certification programs and continuing education requirements in several professions has contributed to an annual growth rate of 15% for Laserwords since 2012. Laserwords’ original facility became obsolete by early 2017 because of the increased sales volume and the fact that Laserwords now carries CDs in addition to books.
On June 1, 2017, Laserwords contracted with Black Construction to have a new building constructed for \(4,000,000 on land owned by Laserwords. The payments made by Laserwords to Black Construction are shown in the schedule below.
Date | Amount |
July 30, 2017 | \) 900,000 |
January 30, 2018 | 1,500,000 |
May 30, 2018 | 1,600,000 |
Total payments | \(4,000,000 |
Construction was completed and the building was ready for occupancy on May 27, 2018. Laserwords had no new borrowings directly associated with the new building but had the following debt outstanding at May 31, 2018, the end of its fiscal year
10%, 5-year note payable of \)2,000,000, dated April 1, 2014, with interest payable annually on April 1.
12%, 10-year bond issue of $3,000,000 sold at par on June 30, 2010, with interest payable annually on June 30.
The new building qualifies for interest capitalization. The effect of capitalizing the interest on the new building, compared with the effect of expensing the interest, is material.
Instructions
Question: 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?
(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 \(340 to Dick Tracy Business Machine Company (dealer) in exchange for a new machine. Assume the following information about the machines.
Busytown Corp. (Old Machine) | Dick Tracy Co. (New Machine) | |
Machine cost | \)290 | $270 |
Accumulated depreciation | 140 | 0 |
Fair Value | 85 | 425 |
Instructions
For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)
(Disposition of Assets) On April 1, 2017, Gloria Estefan Company received a condemnation award of \(430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway. The land and building cost \)60,000 and \(280,000, respectively, when they were acquired. At April 1, 2017, the accumulated depreciation relating to the building amounted to \)160,000. On August 1, 2017, Estafan purchased a piece of replacement property for cash. The new land cost \(90,000, and the new building cost \)400,000.
Instructions
Prepare the journal entries to record the transactions on April 1 and August 1, 2017.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
