Siniaro - Long-Term Asset Acquisition Emmett & Gracie (E & G) is considering a s
ID: 2420001 • Letter: S
Question
Siniaro - Long-Term Asset Acquisition
Emmett & Gracie (E & G) is considering a significant equipment replacement. E & G would like to replace some of their equipment before December 31, 2016. The equipment originally cost $840,000 and the equipment’s accumulated depreciation balance at the end of 2015 is will be $790,000. At this point the equipment is depreciated to its salvage value.Your long-term asset accountant, Joe, tells you about this equipment option 3 as follows:
3. purchase new equipment that is more efficient and sell the old equipment, The estimated life of any new equipment is 7 years.
E & G would like you to analyze option 3 to determine the financial impact of this decision and any non-financial considerations that may result from this decision. Additional information about option 3 is presented below:
Option 3: Purchase the new equipment by giving a non-interest-bearing note with five payments of $199,000 to the supplier (starting on the first day of note’s term and each year thereafter) and selling the old equipment for $60,000 cash. The first $199,000 payment would be made in late December 2016. The prevailing interest rate for obligations of this nature is 10%.
Instructions: (A) Prepare jounral entries in general journal form for option 3 and (B) explain on how option 3 affects the finacial statments and the strengths and weaknesses of this option.
Explanation / Answer
The Anticipated Expenditure for the construction of Asset = present value of Annuity due for $ 199000 for five payments = $ 8,29,803. The interest portion will be expensed off every year Total value of Asset = 829803 gain on sale of Asset Book value = 50000 & Fair value = $60000 Therefore Gain on Sale = 10000 Journal entries Asset Account Dr 829803 To Accounts payable 630803 To Cash 199000 Cash account Dr 60000 To Gain on sale of Asset 50000 To Asset Account 10000 The above decision will result in 829803 addition to fixed assets & gain of $ 10000. The Organisation can claim depreciation on the present value of the Annuity payments i.e 829803 & should expense off the interst portion of instalment every year. The advantage is it can make/ differ payment with out any interest as it is financed through interest free notes payable.