BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
1 views

Lurch Company’s December 31, 2018, balance sheet follows:

Chapter 11, Problem 21P, Lurch Companys December 31, 2018, balance sheet follows: During 2019, the following transactions

During 2019, the following transactions occurred:

  1. 1. To avoid paying monthly rent of $5,000 on existing plant facilities, the company decided to buy a tract of land and construct a building of its own on it. On January 2, 2019, Lurch exchanged 6,000 shares of its common stock to acquire the land; the stock was selling for $25 per share. Construction of the building also began on January 2, 2019. At the time, Lurch borrowed funds by issuing a 1-year, $500,000 note at 12% to help finance the project. The principal and interest on the note are due January 3, 2020. Construction costs (paid in cash) that occurred evenly throughout the year totaled $700,000. The building was completed on December 30, 2019, and the move-in to the new building was to occur during the next week.
  2. 2. On January 2, 2019, Lurch exchanged its one existing machine plus $50,000 for a newer machine with a fair value of $430,000. The new machine is to be depreciated using straight-line depreciation based on an economic life of 5 years and a residual value of $55,000.
  3. 3. Lurch uses a FIFO perpetual inventory system. Lurch sold $350,000 of its inventory for $700,000 cash, paid for its beginning accounts payable, and purchased $480,000 of inventory on account during the year.
  4. 4. On July 31, 2019, Lurch declared and paid a $2.50 per share cash dividend to its shareholders.
  5. 5. Lurch is subject to a 21% income tax rate, and income taxes are accrued at year-end.

Required:

Prepare Lurch’s income statement and statement of retained earnings for the fiscal year ended December 31, 2019, and a balance sheet as of December 31, 2019. Show all supporting journal entries and computations made during 2019. (Contributed by Scott I. Jerris)

To determine

Prepare necessary journal and adjusting entries for 2019, and prepare the income statement, statement of retained earnings, and balance sheet of Company L for the fiscal year ended December 31, 2019.

Explanation

Depreciation expense: Depreciation expense is a non-cash expense, which is recorded on the income statement reflecting the consumption of economic benefits of long-term asset on account of its wear and tear or obsolesces.

Prepare a schedule screening the depreciation expense, amortization expense, accumulated depreciation and amortization for each asset that would appear on the income statement and balance sheet of Company B for the year ended December 31, 2019 as follows:

Journal and adjusting entries:

Date Account Title & ExplanationDebit ($)Credit($)
Journal entries during the year 2019:
 (1)Land (1)150,000
  Common stock60,000
  Additional paid in capital90,000
  (To record the land purchased with exchange of shares)
  Cash500,000
  Notes payable500,000
  (To record the cash borrowed on notes)
  Building700,000
  Cash700,000
  (To record the building purchased for cash)
 (2)Machine430,000
  Accumulated depreciation135,000
  Machine500,000
  Cash50,000
  Gain on disposal of property, plant and equipment (2)15,000
  (To record the gain on disposal of property, plant and machinery)
 (3)Cash 700,000
  Sales revenue700,000
  (To record the sales revenue incurred)
  Cost of goods sold350,000
  Inventory350,000
  (To record the cost of goods sold incurred)
  Accounts payable400,000
  Cash400,000
  (To record the  cash paid to creditors)
  Inventory480,000
  Accounts payable480,000
  (To record the inventories purchased on account)
 (4)Retained earnings (3)90,000
  Cash90,000
  (To record the cash dividends paid to shareholders)
Adjusting entries at the end of the 2019:
  

Interest expense

($60,000$42,000)

18,000
  Building (4)42,000
  Interest payable (5)60,000
  (To record the interest expense incurred at the end of the accounting year)
  Depreciation expense (6)75,000
  Accumulated depreciation75,000
  (To record  the depreciation expense incurred at the end of the accounting year)
  Rent expense60,000
  Prepaid rent60,000
  (To record the rent expense incurred at the end of the accounting period)
  Income tax expense44,520
  Income tax payable44,520
  (To record the income tax expense incurred at the end of  the year )

Table (1)

Working note (1):

Calculate the value of land.

Value of land = Number of shares ×Sellling price per share=6,000 shares×$25 per share=$150,000

Working note (2):

Calculate the gain on disposal of machine.

Gain from disposal =( Fair value of asset surrenderedBook value of asset surrendered)=($430,000$50,000)($500,000$135,000)=$15,000

Working note (3):

Calculate the value of cash dividends.

Cash dividends = Number of shares × Dividend per share=36,000 shares×$2.50 per share=$90,000

Working note (4):

Calculate the value of building

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

Fill in the blanks:

Principles of Macroeconomics (MindTap Course List)

Why do economists use real GDP rather than nominal GDP to gauge economic well-being?

Brief Principles of Macroeconomics (MindTap Course List)

CASH CONVERSION CYCLE Primrose Corp has 15 million of sales, 2 million of inventories, S3 million of receivable...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)