10 Acquisition and Disposition of Property, Plant, and Equipment EXERCISES 10.2
E10-17 (L04) (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.
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Instructions
For each company, prepare the necessary journal entry to record the exchange. (The exchange has commercial substance.)
E10-18 (L04) (Nonmonetary Exchange) Cannondale Company purchased an electric wax melter on April 30, 2017, by trading in its old gas model and paying the balance in cash. The following data relate to the purchase.
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Instructions
Prepare the journal entry(ies) necessary to record this exchange, assuming that the exchange (a) has commercial substance, and
(b) lacks commercial substance. Cannondale’s fiscal year ends on December 31, and depreciation has been recorded through
December 31, 2016.
E10-19 (L04) (Nonmonetary Exchange) Carlos Arruza Company exchanged equipment used in its manufacturing operations plus $3,000 in cash for similar equipment used in the operations of Tony LoBianco Company. The following information pertains to the exchange.
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Instructions
(a) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange lacks commercial substance.
(b) Prepare the journal entries to record the exchange on the books of both companies. Assume that the exchange has commercial substance.
E10-20 (L04) (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
(a) Prepare the general journal entry to record this transaction, assuming that the exchange has commercial substance.
(b) 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.
E10-21 (L05) GROUPWORK (Analysis of Subsequent Expenditures) King Donovan Resources Group has been in its plant facility for 15 years. Although the plant is quite functional, numerous repair costs are incurred to maintain it in sound working order. The company’s plant asset book value is currently $800,000, as indicated below.
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During the current year, the following expenditures were made to the plant facility.
(a) Because of increased demands for its product, the company increased its plant capacity by building a new addition at a cost of $270,000.
(b) The entire plant was repainted at a cost of $23,000.
(c) The roof was an asbestos cement slate. For safety purposes, it was removed and replaced with a wood shingle roof at a cost of $61,000. Book value of the old roof was $41,000.
(d) The electrical system was completely updated at a cost of $22,000. The cost of the old electrical system was not known.
It is estimated that the useful life of the building will not change as a result of this updating.
(e) A series of major repairs were made at a cost of $47,000, because parts of the wood structure were rotting. The cost of the old wood structure was not known. These extensive repairs are estimated to increase the useful life of the building.
Instructions
Indicate how each of these transactions would be recorded in the accounting records.
E10-22 (L05,6) (Analysis of Subsequent Expenditures) The following transactions occurred during 2017. Assume that depreciation of 10% per year is charged on all machinery and 5% per year on buildings, on a straight-line basis, with no estimated salvage value. Depreciation is charged for a full year on all fixed assets acquired during the year, and no depreciation is charged on fixed assets disposed of during the year.
Jan. 30 A building that cost $132,000 in 2000 is torn down to make room for a new building. The wrecking contractor was paid $5,100 and was permitted to keep all materials salvaged.
Mar. 10 Machinery that was purchased in 2010 for $16,000 is sold for $2,900 cash, f.o.b. purchaser’s plant. Freight of $300 is paid on the sale of this machinery.
Mar. 20 A gear breaks on a machine that cost $9,000 in 2009. The gear is replaced at a cost of $2,000. The replacement does not extend the useful life of the machine but does make the machine more efficient.
May 18 A special base installed for a machine in 2011 when the machine was purchased has to be replaced at a cost of $5,500 because of defective workmanship on the original base. The cost of the machinery was $14,200 in 2011. The cost of the base was $3,500, and this amount was charged to the Machinery account in 2011.
June 23 One of the buildings is repainted at a cost of $6,900. It had not been painted since it was constructed in 2013.
Instructions
Prepare general journal entries for the transactions. (Round to the nearest dollar.)
E10-23 (L05) (Analysis of Subsequent Expenditures) Plant assets often require expenditures subsequent to acquisition. It is important that they be accounted for properly. Any errors will affect both the balance sheets and income statements for a number of years.
Instructions
For each of the following items, indicate whether the expenditure should be capitalized (C) or expensed (E) in the period incurred.
(a) __________ Improvement.
(b) __________ Replacement of a minor broken part on a machine.
(c) __________ Expenditure that increases the useful life of an existing asset.
(d) __________ Expenditure that increases the efficiency and effectiveness of a productive asset but does not increase its salvage value.
(e) __________ Expenditure that increases the efficiency and effectiveness of a productive asset and increases the asset’s salvage value.
(f) __________ Expenditure that increases the quality of the output of the productive asset.
(g) __________ Improvement to a machine that increased its fair market value and its production capacity by 30% without extending the machine’s useful life.
(h) __________ Ordinary repairs.
E10-24 (L06) (Entries for Disposition of Assets) On December 31, 2017, Travis Tritt Inc. has a machine with a book value of $940,000. The original cost and related accumulated depreciation at this date are as follows…
Instructions
Presented below is a set of independent situations. For each independent situation, indicate the journal entry to be made to record the transaction. Make sure that depreciation entries are made to update the book value of the machine prior to its disposal.
(a) A fire completely destroys the machine on August 31, 2018. An insurance settlement of $430,000 was received for this casualty. Assume the settlement was received immediately.
(b) On April 1, 2018, Tritt sold the machine for $1,040,000 to Dwight Yoakam Company.
(c) On July 31, 2018, the company donated this machine to the Mountain King City Council. The fair value of the machine at the time of the donation was estimated to be $1,100,000.
E10-25 (L06) (Disposition of Assets) On April 1, 2017, Gloria Estefan Company received a condemnation award of $430,000 cash as compensation for the forced sale of the company’s land and building, which stood in the path of a new state highway.
The land and building cost $60,000 and $280,000, respectively, when they were acquired. At April 1, 2017, the accumulated depreciation relating to the building amounted to $160,000. On August 1, 2017, Estafan purchased a piece of replacement property for cash. The new land cost $90,000, and the new building cost $400,000.
Instructions
Prepare the journal entries to record the transactions on April 1 and August 1, 2017.
