Chapter 10: Q1Q (page 530)
Question: What are the major characteristics of plant assets?
Answer
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Crowe Company purchased a heavy-duty truck on July 1, 2014, 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, 2018, 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?
(Capitalization of Interest) On December 31, 2016, Main Inc. borrowed \(3,000,000 at 12% payable annually to finance the construction of a new building. In 2017, the company made the following expenditures related to this building: March 1, \)360,000; June 1, \(600,000; July 1, \)1,500,000; December 1, \(1,500,000. The building was completed in February 2018. Additional information is provided as follows.
1. Other debt outstanding
10-year, 13% bond, December 31, 2010, interest payable annually \)4,000,000
6-year, 10% note, dated December 31, 2014, interest payable
annually \(1,600,000
2. March 1, 2017, expenditure included land costs of \)150,000
3. Interest revenue earned in 2017 $49,000
Instructions
(a) Determine the amount of interest to be capitalized in 2017 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 at December 31, 2017.
(Purchases by Deferred Payment, Lump-Sum, and Nonmonetary Exchanges) Klamath Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Klamath’s controller, review the following transactions.
Transaction 1: On June 1, 2017, Klamath Company purchased equipment from Wyandot Corporation. Klamath issued a \(28,000, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Klamath will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 10%. Freight costs of \)425 and installation costs of \(500 were incurred in completing this transaction. The appropriate factors for the time value of money at a 10% rate of interest are given below.
Future value of \)1 for 4 periods | 1.46 |
Future value of an ordinary annuity for 4 periods | 4.64 |
Present value of \(1 for 4 periods | 0.68 |
Present value of an ordinary annuity for 4 periods | 3.17 |
Transaction 2: On December 1, 2017, Klamath Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to \)220,000 and included the assets listed below. Klamath Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.
Yakima Book Value | Fair Value | |
Inventory | \( 60,000 | \) 50,000 |
Land | 40,000 | 80,000 |
Buildings | 70,000 | 120,000 |
\(170,000 | \)250,000 |
During its fiscal year ended May 31, 2018, Klamath incurred \(8,000 for interest expense in connection with the financing of these assets.
Transaction 3: On March 1, 2018, Klamath Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Klamath intends to use the land for a parking lot. The trucks had a combined book value of \)35,000, as Klamath had recorded \(20,000 of accumulated depreciation against these assets. Klamath’s purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of \)46,000 at the time of the transaction. In addition to the trucks, Klamath Company paid $19,000 cash for the land.
Instructions
For each of these transactions, indicate whether the asset should be classified as a plant asset. If it is a plant asset, explain why it is. If it is not a plant asset, explain why not, and identify the proper classification.
(Purchase of Computer with Zero-Interest-Bearing Debt) Cardinals Corporation purchased a computer on December 31, 2016, 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 2017. An assumed interest rate of 10% is implicit in the purchase price.
Instructions
(Round to two decimal places.)
(Correction of Improper Cost Entries) Plant acquisitions for selected companies are as follows.
Book Values | Appraisal Values | |
Land | \)200,000 | \(150,000 |
Buildings | 250,000 | 350,000 |
Equipment | 300,000 | 300,000 |
To be conservative, the company decided to take the lower of the two values for each asset acquired. The following entry was made.
Land 150,000
Buildings 250,000
Equipment 300,000
Cash 700,000
2. Harry Enterprises purchased store equipment by making a \)2,000 cash down payment and signing a 1-year, \(23,000, 10% note payable. The purchase was recorded as follows.
Equipment 27,300Cash 2,000
Notes Payable 23,000
Interest Payable 2,300
3. Kim Company purchased office equipment for \)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:
Equipment 20,000
Cash 19,600
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.
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.
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