1.
Journalize entries to record each acquisition.
1.
Explanation of Solution
Property, Plant, and Equipment:
Property, Plant, and Equipment refers to the fixed assets, having a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue.
Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.
Accounting rules for Journal entries:
- To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
- To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains
Prepare journal entries:
Date | Account titles and explanation | Debit ($) | Credit ($) | ||
a | Machine(new) (1) | 34,000 | |||
15,000 | |||||
Machine (old) | 40,000 | ||||
Cash | 4,000 | ||||
Gain on exchange (3) | 5,000 | ||||
( To record the machine acquired by paying cash and giving up machine) | |||||
b | Machine (new) (4) | 34,000 | |||
Accumulated depreciation for machine (5) | 7,000 | ||||
Loss on exchange (6) | 3,000 | ||||
Machine (old) | 40,000 | ||||
Cash | 4,000 | ||||
( To record the machine surrendered) | |||||
c | Machine (new) (7) | ||||
Accumulated depreciation for machine (8) | |||||
Cash | |||||
Machine (old) | |||||
Gain on exchange (9) | |||||
( To record the machine acquired by receiving cash and giving up machine) | |||||
d | Machine (new) (10) | 27,000 | |||
Accumulated Depreciation for Machine (11) | 9,000 | ||||
Loss on Exchange (12) | 4,000 | ||||
Cash | 5,000 | ||||
Machine (old) | 45,000 | ||||
( To record the machine surrendered) | |||||
e | Machine (new) (13) | 90,000 | |||
Accumulated Depreciation for Machine (14) | 70,000 | ||||
Machine (old) | 150,000 | ||||
Gain on Exchange (15) | 10,000 | ||||
( To record the machine acquired by paying cash and giving up machine) | |||||
f | Machine (new) (16) | 90,000 | |||
Accumulated Depreciation for Machine (17) | 56,000 | ||||
Loss on Exchange (18) | 4,000 | ||||
Machine (old) | 150,000 | ||||
( To record the machine surrendered) | |||||
g | Building (19) | 200,000 | |||
Gain on Exchange (20) | 70,000 | ||||
Land | 130,000 | ||||
( To record the building acquired in exchange for land) | |||||
h | Building (21) | 230,000 | |||
Gain on Exchange (22) | 70,000 | ||||
Cash | 30,000 | ||||
Land | 130,000 | ||||
( To record the building acquired in exchange for land and paid cash) | |||||
i | Building (23) | 180,000 | |||
Cash | 20,000 | ||||
Gain on Exchange (24) | 70,000 | ||||
Land | 130,000 | ||||
( To record the building acquired in exchange for land and received cash) | |||||
Table (1)
Working notes:
Transaction a:
(1) Calculate the cost of the equipment:
(2) Calculate the accumulated depreciation of machine:
(3) Calculate the gain on exchange:
Transaction b:
(4) Calculate the cost of the equipment:
(5) Calculate the accumulated depreciation of machine:
(6) Calculate the loss on exchange:
Transaction c:
(7) Calculate the cost of the equipment:
(8) Calculate the accumulated depreciation of machine:
(9) Calculate the gain on exchange:
Transaction d:
(10) Calculate the cost of the equipment:
(11) Calculate the accumulated depreciation of machine:
(12) Calculate the loss on exchange:
Transaction e:
(13) Calculate the cost of the equipment:
(14) Calculate the accumulated depreciation of machine:
(15) Calculate the gain on exchange:
Transaction f:
(16) Calculate the cost of the equipment:
(17) Calculate the accumulated depreciation of machine:
(18) Calculate the loss on exchange:
Transaction g:
(19) Calculate the cost of the building:
(20) Calculate the gain on exchange:
Transaction h:
(21) Calculate the cost of the building:
(22) Calculate the gain on exchange:
Transaction i:
(23) Calculate the cost of the building:
(24) Calculate the gain on exchange:
2.
Record journal entries assuming that item e does not have commercial substance.
2.
Explanation of Solution
Prepare journal entry:
Date | Account titles and explanation | Debit ($) | Credit ($) | |
Machine(new) | 80,000 | |||
Accumulated | 70,000 | |||
Machine (old) | 150,000 | |||
Table (12)
- Machine (new) is an asset and it is increased. Therefore, debit machine (new) account by $80,000.
- Accumulated depreciation for machine is a contra asset and it is decreased. Therefore, debit Accumulated depreciation for machine account by $70,000.
- Machine (old) is an asset and it is decreased. Therefore, credit machine (old) account by $150,000.
Note: “Item e” does not have commercial substance therefore, the gain is deferred.
Working notes:
(25) Calculate the cost of the machine (new):
(26) Calculate gain on exchange:
3.
Explain the justification of different accounting between the exchanges having commercial substance versus the exchanges without commercial substance.
3.
Explanation of Solution
The economic condition of the both companies change and the expected cash flows in future moderately change due to exchange, thus difference accounting is justified, if an exchange is having commercial substance. So, that gains and losses are identified during the time of exchange. On the other hand, if an exchange is without a commercial substance, both of the companies are in the equal economic position. Thus, while the principle of “conservatism” permits recognition of losses, a company will defer gains unless a transaction occurs to modify the cash flow of the company.
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Chapter 10 Solutions
Intermediate Accounting: Reporting and Analysis
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