Chapter 10: Q9BE (page 532)
Use the information for Navajo Corporation from BE10-8. Prepare the journal entry to record the exchange, assuming the exchange lacks commercial substance.
The new truck would be recorded at $2,500 for deferring gains.
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(Classification of Land and Building Costs) Spitfire Company was incorporated on January 2, 2018, but was unable to begin manufacturing activities until July 1, 2018, because new factory facilities were not completed until that date.
The Land and Buildings account reported the following items during 2018.
January 31 | Land and buildings | \(160,000 |
February 28 | Cost of removal of building | 9,800 |
May 1 | Partial payment of new construction | 60,000 |
May 1 | Legal fees paid | 3,770 |
June 1 | Second payment on new construction | 40,000 |
June 1 | Insurance premium | 2,280 |
June 1 | Special tax assessment | 4,000 |
June 30 | General expenses | 36,300 |
July 1 | Final payment on new construction | 30,000 |
December 31 | Asset write-up | 53,800 |
399,950 | ||
December 31 | Depreciation—2018 at 1% | (4,000) |
December 31, 2018 | Account balance | \)395,950 |
The following additional information is to be considered.
1. To acquire land and building, the company paid \(80,000 cash and 800 shares of its 8% cumulative preferred stock, par value \)100 per share. Fair value of the stock is \(117 per share.
2. Cost of removal of old buildings amounted to \)9,800, and the demolition company retained all materials of the building.
3. Legal fees covered the following.
| Cost of organization | \( 610 |
| Examination of title covering purchase of land | 1,300 |
| Legal work in connection with construction contract | 1,860 |
| \)3,770 |
4. Insurance premium covered the building for a 2-year term beginning May 1, 2018.
5. The special tax assessment covered street improvements that are permanent in nature.
6. General expenses covered the following for the period from January 2, 2018, to June 30, 2018.
| President’s salary | \(32,100 |
| Plant superintendent’s salary—supervision of new building | 4,200 |
| \)36,300 | |
7. Because of a general increase in construction costs after entering into the building contract, the board of directors increased the value of the building \(53,800, believing that such an increase was justified to reflect the current market at the time the building was completed. Retained earnings was credited for this amount.
8.Estimated life of building—50 years. Depreciation for 2018—1% of asset value (1% of \)400,000, or $4,000).
Instructions
(Purchase and Self-Constructed Cost of Assets) Worf Co. both purchases and constructs various equipment it uses in its operations. The following items for two different types of equipment were recorded in random order during the calendar year 2017.
Purchase
Cash paid for equipment, including sales tax of \(5,000 \)105,000
Freight and insurance cost while in transit 2,000
Cost of moving equipment into place at factory 3,100
Wage cost for technicians to test equipment 4,000
Insurance premium paid during first year of operation 1,500
on this equipment
Special plumbing fixtures required for new equipment 8,000
Repair cost incurred in first year of operations related 1,300
to this equipment
Construction
Material and purchased parts (gross cost \(200,000;
failed to take 2% cash discount) \)200,000
Imputed interest on funds used during
construction (stock financing) 14,000
Labor costs 190,000
Allocated overhead costs (fixed—\(20,000;
variable—\)30,000) 50,000
Profit on self-construction 30,000
Cost of installing equipment 4,400
Instructions
Compute the total cost for each of these two pieces of equipment. If an item is not capitalized as a cost of the equipment, indicate how it should be reported.
The invoice price of a machine is \(50,000. Various other costs relating to the acquisition and installation of the machine, including transportation, electrical wiring, special base, and so on amount to \)7,500. The machine has an estimated life of 10 years, with no salvage value at the end of that period.
The owner of the business suggests that the incidental costs of \(7,500 be charged to theexpense immediately for the following reasons.
Instructions
Discuss each of the points raised by the owner of the business.
Question: Stan Ott is evaluating two recent transactions involving exchanges of equipment. In one case, the exchange has commercial substance. In the second situation, the exchange lacks commercial substance. Explain to Stan the differences in accounting for these two situations.
Question: When should debt security be classified as held-to-maturity?
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