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E10-16) Logan Industries purchased the following assets and constructed a building as well. All this was done during the current year.
Assets 1 and 2
These assets were purchased as a lump sum for $104,000 cash. The following information was gathered:
Machinery- Initial cost on seller's books: $100,000, Depreciation to date on seller's books: $50,000, Book value on seller's books:$50,000, appraised value: $90,000
Office Equipment: Initial cost on seller's books: $60,000, Depreciation to date on seller's books: $10,000, Book value on seller's books:$50,000, appraised value: $30,000
This machine was acquired by making a $10,000 down payment and issuing a $30,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $15,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $35,900.
This machinery was acquired by trading in used machinery. (This exchange lacks commercial substance.) Facts concerning the trade-in are as follows:
Cost of machinery traded: $100,000
Accumulated depreciation to date of sale: $36,000
Fair value of machinery traded: $80,000
Cash received: $10,000
Fair value of machinery acquired: $70,000
Office equipment was acquired by issuing 100 shares of $8 par value common stock. The stock had a market value of $11 per share.
Construction of Building
A building was constructed on land purchased last year at a cost of $180,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows:
To finance construction of the building, a $600,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $200,000 of other outstanding debt during the year at a borrowing rate of 8%.
Record the acquisition of each of these assets.
E10-19) Santana Company exchanged equipment used in its manufacturing operations plus $2,000 in cash for similar equipment used in the operations of Delaware Company. The following information pertains to the exchange.
Equipment (cost): $28,000
Accumulated depreciation: $19,000
Fair value of equipment: $13,500
Cash given up: $2,000
Equipment (cost): $28,000
Accumulated depreciation: $10,000
Fair value of equipment: $15,500
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 the exchange has commercial substance.
P 10-3) Spitfire Company was incorporated on January 2,1011, but was unable to begin manufacturing activities until July 1, 2011, because new factory facilities were not completed until that date.
The Land and Building account reported the following items during 2011.
January 31: Land and Building $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
December 31: Depreciation-2011 at 1% $4,000
December 31, 2011: 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 market 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 by the following.
Cost of organization: $610
Examination of title covering purchase of land: $1,300
Legal work in connection with construction contract: $1,860
4. Insurance premiums covered the building for a 2-year term beginning May 1, 2011.
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, 2011, to June 30, 2011.
President's salary: $32,100
Plant superintendent's salary-supervision of new building: $4,200
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 2011: 1% of asset value (1% of $400,000, or $4,000)
a) Prepare entries to reflect correct land, building, and depreciation accounts at December 31, 2011.
b) Show the proper presentation of land, building, and depreciation on the balance sheet at December 31, 2011.
E11-4) Wenner Furnace Corp. purchased machinery for $279,000 on May 1, 2010. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2011 Wenner Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.
From the information given, compute the depreciation charge for 2011 under each of the following methods. (Round to the nearest dollar)
c) Working hours
E11-20) Federer Drilling Company has leased property on which oil has been discovered. Wells on this property produced 18,000 barrels of oil during the past year that sold at an average sales price of $65 per barrel. Total oil resources of this property are estimated to be $250,000 barrels.
The lease provided for an outright payment of $600,000 to the lessor (owner) before drilling could be commenced and an annual rental of $31,500. A premium of 5% of the sales price of every barrel of oil removed is to be paid annually to the lessor. In addition, Federer (lessee) is to clean up all the waste and debris from drilling and to bear the costs of reconditioning the land for farming when the wells are abandoned. The estimated fair value, at the time of the lease, of this clean-up and reconditioning is $30,000.
From the provisions of the lease agreement, compute the cost per barrel for the past year, exclusive of operating costs, to Federer Drilling Company.
P11-10) Kohlbeck Corporation, a manufacturer of steel products, began operations on October 1, 2009. The accounting department of Kohlbeck has started the fixed-asset and depreciation schedule presented below.You have been asked to assist in completing this schedule. In addition to ascertaining that the data already on the schedule is correct, you have obtained the following information from the company's records and personnel.
1. Depreciation is computed from the first of the month of acquisition to the first of the month of disposition.
2. Land A and Building A were acquired from a predecessor corporation. Kohlbeck paid $800,000 for the land and building together. At the time of acquisition, the land had an appraised value of $90,000, and the building had an appraised value of $810,000.
3. Land B was acquired on October 2, 2009, in exchange for 2,500 newly issued shares of Kohlbeck's common stock. At the date of acquisition, the stock had a par value of $5 per share and a fair value of $30 per share. During October 2009, Kohlbeck paid $16,000 to demolish an existing building on this land so it could construct a new building.
4. Construction of Building B on the newly acquired land began on October 1, 2010. By September 30,2011, Kohlbeck had paid $320,000 of the estimated total construction costs of $450,000. It is estimated that the building will be completed and occupied by July 2012.
5. Certain equipment was donated to the corporation by a local university. An independent appraisal of the equipment when donated placed the fair market value at $40,000 and the salvage value at $3,000.
6. Machinery A's total cost of $182,900 includes installation expense of $600 and normal repairs and maintenance of $14,900. Salvage value is estimated at $6,000. Machinery A was sold on February 1,2011.
7. On October 1, 2010, Machinery B was acquired with a down payment of $5,740 and the remaining payments to be made in 11 annual installments of $6,000 each beginning October 1, 2010. The prevailing interest rate was 8%. The following data were abstracted from present-value tables (rounded).
Present value of $1.00 at 8%
10 years= .463
Present value of an ordinary annuity of $1.00 at 8%
10 years= 6.710
11 years= 7.139
15 years= 8.559