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Chapter 10: Q17E (page 538)

(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.)

Short Answer

Expert verified
  1. In Busytown Corporation, Accumulated depreciation is $140
  2. In Dick Tracy Company, sales revenue is $425

Step by step solution

01

Meaning of Journal

Journal refers to recording business transactions in the manner in which they occurred.

02

Preparing journal entries for Busytown Corp.

Date

Particular

Debit ($)

Credit ($)

Machinery

425

Accumulated Depreciation-Machinery

140

Loss on Disposal of Machinery

65

Machinery

290

Cash

340

Working notes:

Computation of loss

Book value of old machine($290-$140)

$150

Less: Fair value of old machine

85

Loss on disposal of machinery

$ 65

03

Preparing journal entries for Dick Tracy Co.

Date

Particular

Debit ($)

Credit ($)

Cash

340

Inventory

85

Cost of Goods Sold

270

Sales Revenue

425

Inventory

270

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Most popular questions from this chapter

  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.

Land 150,000

Buildings 250,000

Equipment 300,000

Cash 700,000

  1. 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.

Equipment 27,300

Cash 2,000

Notes Payable 23,000

Interest Payable 2,300

  1. 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:

Equipment 20,000

Cash 19,600

Purchase Discounts 400

  1. 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 \(27,000. The company made no entry to record the land because it had no cost basis.
  2. Zimmerman Company built a warehouse for \)600,000. It could have purchased the building for $740,000. The controller made the following entry.

Buildings740,000

Cash 600,000

Profit on Construction 140,000

Instructions

Prepare the entry that should have been made at the date of each acquisition.

(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

Buildings

1,200,000

Equipment

800,000

Total

\)2,400,000

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 office 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.

Instructions

Prepare entries on the books of Zonker Company for these transactions.

Question: (Classification of Costs and Interest Capitalization) On January 1, 2017, Blair Corporation purchased for \(500,000 a tract of land (site number 101) with a building. Blair paid a real estate broker’s commission of \)36,000, legal fees of \(6,000, and title guarantee insurance of \)18,000. The closing statement indicated that the land value was \(500,000 and the building value was \)100,000. Shortly after acquisition, the building was razed at a cost of \(54,000.

Blair entered into a \)3,000,000 fixed-price contract with Slatkin Builders, Inc. on March 1, 2017, for the construction of an office building on land site number 101. The building was completed and occupied on September 30, 2018. Additional construction costs were incurred as follows:

Plans, specifications, and blueprints \(21,000

Architects’ fees for design and supervision 82,000

The building is estimated to have a 40-year life from date of completion and will be depreciated using the 150% declining balance method.

To finance construction costs, Blair borrowed \)3,000,000 on March 1, 2017. The loan is payable in 10 annual installments of \(300,000 starting on March 1, 2018, plus interest at the rate of 10%. Blair’s weighted-average amounts of accumulated building construction expenditures were as follows.

For the period March 1 to December 31, 2017 \)1,300,000

For the period January 1 to September 30, 2018 1,900,000

Instructions

  1. Prepare a schedule that discloses the individual costs making up the balance in the land account in respect of land site number 101 as of September 30, 2018.
  2. Prepare a schedule that discloses the individual costs that should be capitalized in the office building account as of September 30, 2018. Show supporting computations in good form.

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. Instructions 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.

Ottawa Corporation owns machinery that cost \(20,000 when purchased on July 1, 2014. Depreciation has been recorded at a rate of \)2,400 per year, resulting in a balance in accumulated depreciation of \(8,400 at December 31, 2017. The machinery is sold on September 1, 2018, for \)10,500. Prepare journal entries to (a) update depreciation for 2018 and (b) record the sale.
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