Question

(Entries for Asset Acquisition, Including Self-Construction) Below are transactions related to Duffner Company.

1. 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 \(81,000.
2. 13,000 shares of common stock with a par value of \)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.

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 of machinery, excluding factory supplies used	2,700
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

Instructions

Prepare journal entries on the books of Duffner Company to record these transactions.

Short answer

1. Contribution revenue = $81,000
2. Common stock = $650,000
3. Factory overhead = $12,600

Step-by-step solution

Meaning of Acquisition of cost

Acquisition cost refers to a cost incurred by a business entity to purchase a new asset, take over someone's business, etc.

(a) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Land	81,000
	Contribution Revenue		81,000
	(To record the land at fair value)

(b) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Land	180,000
	Buildings	630,000
	Common Stock		650,000
	Paid-in Capital in Excess of Par—Common Stock		160,000
	(To common stock is exchanged with land and building)

Working notes:

Calculation the amount of Common stock

$\begin{array}{rcl}\mathit{C}\mathit{o}\mathit{m}\mathit{m}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{t}\mathit{o}\mathit{c}\mathit{k}& \mathbf{=}& \mathit{S}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\mathit{s}\mathbf{\times }\mathit{P}\mathit{e}\mathit{r}\mathbf{}\mathit{s}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\\ & \mathbf{=}& \mathbf{13}\mathbf{,}\mathbf{000}\mathbf{\times }\mathbf{\$}\mathbf{50}\\ & \mathbf{=}& \mathbf{\$}\mathbf{650}\mathbf{,}\mathbf{000}\end{array}$

Note: The property's market value is used as the foundation for registering the asset and issuance of the stock since the market value of the stock is not determinable.

(c) Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Machinery	40,100
	Materials		12,500
	Direct Labor		15,000
	Factory Overhead		12,600
	(To record the overhead)

Working notes:

Calculation of factory overhead

Fixed overhead applied$\left(60\%\times \$15,000\right)$	$9,000
Additional overhead	2,700
Factory supplies used	900
	$12,600