Part 1: Meurer, Inc. purchased the following assets and constructed a building a
ID: 2559716 • Letter: P
Question
Part 1:
Meurer, Inc. purchased the following assets and constructed a building as well. All this was done during the current year.
Assets 1& 2
These assets were purchased as a lump sum for $186,000 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
Machinery
$65,000
$30,000
$35,000
$160,000
Office Furniture
25,000
10,000
15,000
40,000
Asset 3
This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in as follows.
Cost of machinery traded
$150,000
Accumulated depreciation to date of sale
60,000
Fair value of machinery traded
96,000
Cash Received
20,000
Fair value of machinery acquired
76,000
Asset 4:
Machinery was acquired by issuing 1,000 shares of $1 par value common stock. The stock had a market value of $7 per share.
Asset 5:
Truck has a list price of $20,000 and is acquired on April 1, 2015 with a down payment of $3,000 cash and a zero-interest-bearing note with a face amount of $16,000. The note is due April 1, 2016. Meurer, Inc. would normally have to pay interest at a rate of 10% for such a borrowing, and the dealership has an incremental borrowing rate of 8%.
Asset 6:
Construction of Building
A building was constructed on land (purchased on March 1 with cash) at a cost of $120,000. Construction began on March 1 and was completed on September 1. The payments to the contractor were as follows.
Date
Payment
3/1
$200,000
5/1
300,000
6/1
100,000
9/1
400,000
To finance construction of the building a $600,000, 10% construction loan was taken out on March 1. The loan was repaid on September 1. The firm had $400,000 of other outstanding debt during the year at a borrowing rate of 12%.
Required:
Record the acquisition (journal entry) for each of these assets. Note: for Asset 6, no need to record a journal entry, just record the land and building acquisition cost as of September 1.
Description
Initial Cost on Seller's Books
Depreciation to Date on Seller's Books
Book Value on Seller's Books
Appraised Value
Machinery
$65,000
$30,000
$35,000
$160,000
Office Furniture
25,000
10,000
15,000
40,000
Explanation / Answer
Answer. Assets 1 & 2. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 1 Machinery Dr. 148,800.00 Office Furniture Dr. 37,200.00 To Cash 186,000.00 (Record the Purchase of Assets 1 & 2) Appraised Value Weights Value Machinery 160,000.00 80% 148,800.00 Office Furniture 40,000.00 20% 37,200.00 Total 200,000.00 186,000.00 Assets 3. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 2 Machinery Dr. 70,000.00 Accumulated Depreciation Dr. 60,000.00 Cash Dr. 20,000.00 To Machinery 150,000.00 (Record the Purchase of Assets 3) Assets 4. Journal Entry Date Particulars Dr. Amt. Cr. Amt. 3 Machinery Dr. 7,000.00 To Common Stock 1,000.00 To Paid-in-Capital in excess of Par 6,000.00 (Record the Purchase of Assets 5) Assets 5 Journal Entry Date Particulars Dr. Amt. Cr. Amt. 3 Machinery Dr. 17,545.00 Discount on Issue of Note Dr. 1,455.00 To Cash 3,000.00 To Paid-in-Capital in excess of Par 16,000.00 (Record the Purchase of Assets 5) Table Value Based on n= 1 Years i= 10% Cash Flow Amount Present Value Interest - $16,000 X 0% - - Principal 16,000 14,545 ($16,000 X 0.909091) Issue Price Of Note 14,545 Asset 6 Land 120,000.00 Cost of Construction - Building Calculation of Weighted Cost of Construction Date Weights Amount 1-Mar 200000 x 6/6 200,000.00 1-May 300000 X 4/6 200,000.00 1-Jun 100000 x 3/6 50,000.00 1-Sep 400000 x 0/6 - Total 450,000.00 Interest to be Capitalized = $450,000 X 10% X 6/12 = $22,500 Cost of Building = $1,000,000 + $22,5000 = $1,022,500