Question

(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.

Description	Initial Cost on Seller’s Books	Depreciation to Date on Seller’s Books	Book Value on 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.

Date	Payment
2/1	\)120,000
6/1	360,000
9/1	480,000
11/1	100,000

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%.

Instructions

Record the acquisition of each of these assets.

Short answer

1. Asset 1 and Asset 2 total appraisal = $120,000
2. Asset 3 = Discount on Notes Payable is $4,100
3. Asset 4 = Value of machinery is $52,500
4. Asset 5 = common stock value is $800
5. Construction of building = Avoidable interest is $51,900

Step-by-step solution

Meaning of Lump-Sum Purchase

Lump-sum purchase refers to a purchase in which more than one asset is acquired simultaneously by paying a single price.

Recording Acquisition of Asset 1 and Asset 2

Hayes Industries Acquisition of Assets 1 and 2
Description	Appraisal	Percentage A	Lump-Sum B	Value on Books A*B
Machinery	$90,000	90/120	100,000	75,000
Equipment	30,000	30/120	100,000	25,000
	$120,000

Note: Use Appraised Values to break out the lump-sum purchase

Now, passing journal entries

Date	Particular	Debit ($)	Credit ($)
	Machinery	75,000
	Equipment	25,000
	Cash		100,000

Recording Acquisition of Asset 3

Date	Particular	Debit ($)	Credit ($)
	Machinery	35,900
	Discount on Notes Payable	4,100
	Cash		10,000
	Notes Payable		30,000

Working notes:

Calculation of discount on notes payable

$\begin{array}{rcl}\mathit{D}\mathit{i}\mathit{s}\mathit{c}\mathit{o}\mathit{u}\mathit{n}\mathit{t}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{n}\mathit{o}\mathit{t}\mathit{e}\mathit{s}\mathbf{}\mathit{p}\mathit{a}\mathit{y}\mathit{a}\mathit{b}\mathit{l}\mathit{e}& \mathbf{=}& \mathit{C}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{m}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathbf{+}\mathit{A}\mathit{s}\mathit{s}\mathit{e}\mathit{t}\mathbf{}\mathit{o}\mathit{u}\mathit{t}\mathit{r}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\\ & \mathbf{=}& \mathbf{\$}\mathbf{40}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{900}\\ & \mathbf{=}& \mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{100}\end{array}$

Note: Use the cash price as the asset's basis for recording, with a discount on the note.

Recording Acquisition of Asset 4

Due to the absence of commercial substance of the deal, a profit will be recorded based on the proportion of cash received ($10,000/$80,000) multiplied by the $20,000 gain (FMV of $80,000 minus BV of $60,000). The gain realized will be $2,500, with $17,500 of its remaining unrecognized and utilized to lower the asset's basis.

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Machinery (New)	52,500
	Accumulated Depreciation-Machinery	40,000
	Cash	10,000
	Machinery (Old)		100,000
	Gain on Disposal of Machinery		2,500

Working notes:

Calculation value of machinery

$\begin{array}{rcl}\mathit{M}\mathit{a}\mathit{c}\mathit{h}\mathit{i}\mathit{n}\mathit{e}\mathit{r}\mathit{y}& \mathbf{=}& \mathit{F}\mathit{a}\mathit{i}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{-}\mathit{U}\mathit{n}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{g}\mathit{n}\mathit{i}\mathit{z}\mathit{e}\mathit{d}\mathbf{}\mathit{g}\mathit{a}\mathit{i}\mathit{n}\\ & \mathbf{=}& \mathbf{\$}\mathbf{70}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{17}\mathbf{,}\mathbf{500}\\ & \mathbf{=}& \mathbf{\$}\mathbf{52}\mathbf{,}\mathbf{500}\end{array}$

Recording Acquisition of Asset 5

In this situation, the equipment should be recorded at the stock's current fair market value on Hayes' books. Paid-in Capital in Excess of Par -Common Stock should be credited with the difference between the stock's par value and its fair market value.

Preparing journal entry

Date	Particular	Debit ($)	Credit ($)
	Equipment	1,100
	Common Stock		800
	Paid-in Capital in Excess of Par Common Stock		300

Working notes:

Calculation value of common stock

$\begin{array}{rcl}\mathit{C}\mathit{o}\mathit{m}\mathit{m}\mathit{o}\mathit{n}\mathbf{}\mathit{s}\mathit{t}\mathit{o}\mathit{c}\mathit{k}& \mathbf{=}& \mathit{S}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\mathit{s}\mathbf{\times }\mathit{P}\mathit{e}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{s}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\\ & \mathbf{=}& \mathbf{100}\mathbf{\times }\mathbf{\$}\mathbf{8}\\ & \mathbf{=}& \mathbf{\$}\mathbf{800}\end{array}$

Calculation value of equipment

$\begin{array}{rcl}\mathit{E}\mathit{q}\mathit{u}\mathit{i}\mathit{p}\mathit{m}\mathit{e}\mathit{n}\mathit{t}& \mathbf{=}& \mathit{S}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\mathit{s}\mathbf{\times }\mathit{P}\mathit{e}\mathit{r}\mathbf{}\mathit{v}\mathit{a}\mathit{l}\mathit{u}\mathit{e}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{s}\mathit{h}\mathit{a}\mathit{r}\mathit{e}\\ & \mathbf{=}& \mathbf{100}\mathbf{\times }\mathbf{\$}\mathbf{11}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{100}\end{array}$

Preparing schedule for Construction of the building

Construction of Building Schedule of Weighted-Average Accumulated Expenditures
Date	Amount	Current Year Capitalization Period	Weighted-Average Accumulated Expenditures
February 1	$ 150,000	9/12	$112,500
February 1	120,000	9/12	90,000
June 1	360,000	5/12	150,000
September 1	480,000	2/12	80,000
November 1	100,000	0/12	0
	$1,210,000		$432,500

Note: The capitalization is only 9 months in this problem.

Calculation of Avoidable interest

$\begin{array}{rcl}\mathit{A}\mathit{v}\mathit{o}\mathit{i}\mathit{d}\mathit{a}\mathit{b}\mathit{l}\mathit{e}\mathbf{}\mathit{i}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}& \mathbf{=}& \mathit{W}\mathit{e}\mathit{i}\mathit{g}\mathit{h}\mathit{t}\mathit{e}\mathit{d}\mathbf{-}\mathit{A}\mathit{v}\mathit{e}\mathit{r}\mathit{a}\mathit{g}\mathit{e}\mathbf{\times }\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{r}\mathit{a}\mathit{t}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{432}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{0}\mathbf{.}\mathbf{12}\\ & \mathbf{=}& \mathbf{\$}\mathbf{51}\mathbf{,}\mathbf{900}\end{array}$

The particular borrowing rate is employed because the weighted expenditures are smaller than the amount of specific borrowing.

Date	Particular	Debit ($)	Credit ($)
	Land	150,000
	Building	1,111,900
	Cash		1,210,000
	Interest Expense		51,900

Working notes:

Calculating the total cost of building

$\begin{array}{rcl}\mathit{B}\mathit{u}\mathit{i}\mathit{l}\mathit{d}\mathit{i}\mathit{n}\mathit{g}& \mathbf{=}& \mathit{T}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{c}\mathit{o}\mathit{s}\mathit{t}\mathbf{}\mathit{o}\mathit{f}\mathbf{}\mathit{c}\mathit{o}\mathit{n}\mathit{s}\mathit{t}\mathit{r}\mathit{u}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{+}\mathit{I}\mathit{n}\mathit{t}\mathit{e}\mathit{r}\mathit{e}\mathit{s}\mathit{t}\mathbf{}\mathit{e}\mathit{x}\mathit{p}\mathit{e}\mathit{n}\mathit{s}\mathit{e}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{060}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{51}\mathbf{,}\mathbf{900}\\ & \mathbf{=}& \mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{111}\mathbf{,}\mathbf{900}\end{array}$