Metlock Industries purchased the following assets and constructed a building as
ID: 2510191 • Letter: M
Question
Metlock 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 $210,000 cash. The following information was gathered.
Description
Initial Cost on
Seller’s Books
Depreciation to
Date on Seller’s Books
Book Value on
Seller’s Books
Appraised Value
Asset 3: This machine was acquired by making a $21,000 down payment and issuing a $63,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $31,500 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $75,390.
Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.
Asset 5: Equipment was acquired by issuing 100 shares of $17 par value common stock. The stock had a market price of $23 per share.
Construction of Building: A building was constructed on land purchased last year at a cost of $315,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.
Date
Payment
To finance construction of the building, a $1,260,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $420,000 of other outstanding debt during the year at a borrowing rate of 8%.
Record the acquisition of each of these assets. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places e.g. 58,971. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
(To record acquisition of Office Equipment)
Description
Initial Cost on
Seller’s Books
Depreciation to
Date on Seller’s Books
Book Value on
Seller’s Books
Appraised Value
Machinery $210,000 $105,000 $105,000 $189,000 Equipment 126,000 21,000 105,000 63,000Explanation / Answer
For Asset 1 & 2
Journal Entry
EXPLANATION: THE APPRAISED VALUE IS IN RATIO 3:1($189000:$63000) THEREFORE VALUE ALLOCATED TO EACH ASSET - MACHINERY:210000*3/4=$157,500 AND EQUIPMENT 210000*1/4=$52,500
ASSET 3:
Journal Entry
EXPLANATION: MACHINE IS TO BE RECORDED AT ITS FAIR VALUE WHICH IS $75,390
NOTE: DISCOUNT ON NOTE HAS BEEN SHOWN SEPERATLEY , IN SOME CASES YOU CAN NET OFF THE LOSS ON THE ISSUE OF NOTE YOU HAVE MADE OF $8,610 THEN ENTRY WOULD BE:
Journal Entry
ASSET 4:
SINCE THE EXCHANGE LACKS COMMERCIAL SUBSTANCE GAIN SHALL BE RECOGNISED IN PROPORTION OF CASH RECIEVED ($21000/$168000) TIMES THE $42,000 GAIN (FMV OF $168,000 MINUS B.V OF $126,000($210,000-84,000). THE GAIN RECOGNISED THEN WILL BE $5,250 WITH $ 36,750 OF IT BEING DERECOGNISED AND USED TO REDUCE THE BASIS OF ASSET ACQUIRED
Journal Entry
ASSET 5:
Journal Entry
EXPLANATION:OFFICE EQUIPMENT SHALL BE PLACED AT FAIR MARKET VALUE IN BOOKS. THE DIFFERENCE BETWEEN STOCK'S PAR VALUE AND ITS FAIR MARKET VALUE SHOULD BE CREDITED TO ADDITIONAL-PAID IN CAPITAL IN EXCESS OF PAR.
CONSTRUCTION OF BUILDING:
SCHEDULE OF WEIGHTED-AVERAGE OF ACCUMULATED EXPENDITURES
CAPITALISATION PERIOD IS 9 MONTHS(FROM FEB 1 TO NOV 1)
AVOIDABLE INTEREST=WEIGHTED AVERAGE ACCUMULATED EXPENDITURES X INTEREST RATE
=$908,250 X 12% = $108,990
THE WEIGHTED AVERAGE EXPENDITUTRES ARE LESS THAN THE AMOUNT OF SPECIFIC BORROWINGS , THEREFORE SPECIFIC BORROWING RATE I S USED
Journal Entry
DEBIT CREDIT MACHINERY 157,500 EQUIPMENT 52,500 CASH 210,000