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Chapter 10: Q20E (page 539)

(Nonmonetary Exchange) Dana Ashbrook Inc. has negotiated the purchase of a new piece of automatic equipment at a price of \(8,000 plus trade-in, f.o.b. factory. Dana Ashbrook Inc. paid \)8,000 cash and traded in used equipment. The used equipment had originally cost \(62,000; it had a book value of \)42,000 and a secondhand fair value of \(47,800, as indicated by recent transactions involving similar equipment. Freight and installation charges for the new equipment required a cash payment of \)1,100.

Instructions

  1. Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
  2. Assuming the same facts as in (a) except that fair value information for the assets exchanged is not determinable, prepare the general journal entry to record this transaction.

Short Answer

Expert verified
  1. The cost of new equipment is $56,900
  2. The basis of new equipment is $51,100

Step by step solution

01

Meaning of Acquisition of cost

In accounting terms, acquisition cost alludes to the cost of acquiring a particular thing. There are three common trade contexts when it is utilized: mergers and acquisitions, fixed resources, and client acquisition.

02

(a) Preparing journal entry

The exchange has commercial substance

Date

Particular

Debit ($)

Credit ($)

Equipment

56,900

Accumulated Depreciation-Equipment

20,000

Gain on Disposal of Equipment

5,800

Equipment

62,000

Cash

9,100

Working notes:

Calculation of Valuation of equipment

Cash

$ 8,000

Installation cost

1,100

The market value of used equipment

47,800

Cost of new equipment

$56,900

Computation of gain

The fair value of an old asset

$47,800

Cost of old asset $62,000

Less: Accumulated depreciation 20,000

Book value of the old asset

(42,000)

Gain on disposal of equipment

$ 5,800

03

(b) Preparing journal entry

Fair value information is not determinable

Date

Particular

Debit ($)

Credit ($)

Equipment

51,100

Accumulated Depreciation-Equipment

20,000

Equipment

62,000

Cash

9,100

Working notes:

Basis of new equipment

Book value of old equipment

$42,000

Cash paid (including installation costs)

9,100

Basis of new equipment

$51,100

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Most popular questions from this chapter

Johnson & Johnson, the world’s leading and most diversified healthcare corporation, serves its customers through specialized worldwide franchises. Each of its franchises consists of a number of companies throughout the world that focus on a particular healthcare market, such as surgical sutures, consumer pharmaceuticals, or contact lenses. Information related to its property, plant, and equipment in its 2014 annual report is shown in the notes to the financial statements below.

1.Property, Plant and Equipment and Depreciation

Property, plant and equipment are stated at cost. The Company utilizes the straight-line method of depreciation over the estimated useful lives of the assets:

Building and building equipment 20–40 years

Land and leasehold improvements 10–20 years

Machinery and equipment 2–13 years

4. Property, Plant and Equipment

At the end of 2014 and 2013, property, plant and equipment at cost and accumulated depreciation were:

(dollars in millions) 2014 2013

Land and land improvements \( 833 \) 885

Buildings and building equipment 10,046 10,423

Machinery and equipment 22,206 22,527

Construction in progress 3,600 3,298

36,685 37,133

Less accumulated depreciation 20,559 20,423

\(16,126 \)16,710

The Company capitalizes interest expense as part of the cost of construction of facilities and equipment. Interest expense capitalized in 2014, 2013 and 2012 was \(115 million, \)105 million and \(115 million, respectively. Depreciation expense, including the amortization of capitalized interest in 2014, 2013 and 2012, was \)2.5 billion, \(2.7 billion and \)2.5 billion, respectively.

Johnson & Johnson provided the following selected information in its 2014 cash flow statement.

Johnson & Johnson

2014 Annual Report

Consolidated Financial Statements (excerpts)

Net cash flows from operating activities \(18,471

Cash flows from investing activities

Additions to property, plant and equipment (3,714)

Proceeds from the disposal of assets 4,631

Acquisitions, net of cash acquired (2,129)

Purchases of investments (34,913)

Sales of investments 24,119

Other (primarily intangibles) (299)

Net cash used by investing activities (12,305)

Cash flows from financing activities

Dividends to shareholders (7,768)

Repurchase of common stock (7,124)

Proceeds from short-term debt 1,863

Retirement of short-term debt (1,267)

Proceeds from long-term debt 2,098

Retirement of long-term debt (1,844)

Proceeds from the exercise of stock options/excess tax benefits 1,782

Net cash used by financing activities (12,260)

Effect of exchange rate changes on cash and cash equivalents (310)

Increase in cash and cash equivalents (6,404)

Cash and cash equivalents, beginning of year (Note 1) 20,927

Cash and cash equivalents, end of year (Note 1) \)14,523

Supplemental cash flow data

Cash paid during the year for:

Interest $ 603

Income taxes 3,536

Instructions

  1. What was the cost of buildings and building equipment at the end of 2014?
  2. Does Johnson & Johnson use a conservative or liberal method to depreciate its property, plant, and equipment?
  3. What was the actual interest paid by the company in 2014? ‘
  4. What is Johnson & Johnson’s free cash flow? From the information provided, comment on Johnson & Johnson’s financial flexibility.

(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.

Question: How should the amount of interest capitalized be disclosed in the notes to the financial statements? How should interest revenue from temporarily invested excess funds borrowed to finance the construction of assets be accounted for?

Your client is in the planning phase for a major plant expansion, which will involve the construction of a new warehouse. The assistant controller does not believe that interest cost can be included in the cost of the warehouse, because it is a financing expense. Others on the planning team believe that some interest cost can be included in the cost of the warehouse, but no one could identify the specific authoritative guidance for this issue. Your supervisor asks you to research this issue.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Is it permissible to capitalize interest into the cost of assets? Provide authoritative support for your answer.
  2. What are the objectives for capitalizing interest?
  3. Discuss which assets qualify for interest capitalization.
  4. Is there a limit to the amount of interest that may be capitalized in a period?
  5. If interest capitalization is allowed, what disclosures are required?

Indicate which of the following costs should be expensed when incurred.

(a) \(13,000 paid to rearrange and reinstall machinery.

(b) \)200,000 paid for addition to building.

(c) \(200 paid for tune-up and oil change on delivery truck.

(d) \)7,000 paid to replace a wooden floor with a concrete floor.

(e) $2,000 paid for a major overhaul on a truck, which extends the useful life
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