Question

Exercise 10-13 Presented below is information related to Splish Company. 1. On July 6, Splish Company acquired the plant assets of Doonesbury Company, which had discontinued operations. The appraised value of the property is: Land Buildings Equipment Total $300,000 900,000 600,000 $1,800,000 Splish Company gave 12,300 shares of its $100 par value common stock in exchange. The stock had a market price of $168 per share on the date of the purchase of the property. 2. Splish Company expended the following amounts in cash between July 6 and December 15, the date when it first occupied the building. (Prepare consolidated entry for all transactions below.) Repairs to building Construction of bases for equipment to be installed later Driveways and parking lots Remodeling of office space in building, including new partitions and walls Special assessment by city on land $63,000 81,000 73,200 96,600 10,800 3. On December 20, the company paid cash for equipment, $156,000, subject to a 2% cash discount, and freight on equipment of $6,300. Prepare entries on the books of Splish Company for these transactions. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to O 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 o for the amounts.)

Answer 1

Answer 1:

When assets are acquired in exchange of any asset or shares, the accounting in the books of accounts is done on the basis of fair value / appraised value of assets which are acquired. Here the appraised value of assets acquired is as under:

Land	$                    300,000
Building	$                    900,000
Equipment	$                    600,000

Journal entry in the books of Splish Company for acquisition of assets will be as under:

Date	General Journal	Debit	Credit
July 6	Land A/c	$     300,000
	Building A/c	$     900,000
	Equipment A/c	$     600,000
	To Common Stock		$ 1,230,000
	To Premium on common stock		$     570,000
	(being land, building and equipment acquired from Doonesbury Company in exchange of 12,300 shares of $100 par value common stock)

Common stock will be credited at par value i.e. 12,300 *$100= $ 1,230,000

Balance amount i.e. $ 570,000 ($ 1,800,000 - $ 1,230,000) will be credited to premium on common stock. Premium per share will be $570,000 / 12,300 = $ 46.34146 which is lower as compared to market value premium of per share. In market the premium per share is $ 68 ( $168 - $ 100). Hence balance amount of $ 570,000 can fully credited to premium on common stock A/c.

Answer 2:

Journal entry in the books of Splish Company will be as under:

Date	General Journal	Debit	Credit
Consolidated entry from July 6 to December 15	Building A/c	$     159,600
	Equipment A/c	$        81,000
	Land Improvements A/c	$        73,200
	Land A/c	$        10,800
	To Cash A/c		$     324,600

Type of expense	Treatment and explanation
Repairs to building	Amount spent on assets before they are put to use are capitalised to the cost of asset. Since the building is first occupied on December 15, all the expenses till this date will be capitalised to the cost of building
Construction of bases for equipment	Equipment is yet not installed and so not put to use. These expenses for building base for equipment installation will be capitalised to the cost of equipment.
Driveways & Parking lots	Driveways & Parking lots are built on land and these items increases the utility of land. But these are depreciated over the passage of time and its use hence they can not be capitalised to the cost of Land as Land is not a depreciable asset. These expenses are capitalised to Land Improvements A/c and are depreciated over its useful life
Remodeling of office space in building	These expenses are incurred for better use of building, before building is put to use hence they will be capitalised to the cost of building.
Special Assessment by city on land	Special assessment is charged by Government for any public project which enhances the value of real estate / land. Since this will raise the market value of land in this case, it will be capitalised to the cost of land

Answer 3:

Journal entry in the books of Splish Company will be as under:

Date	General Journal	Debit	Credit
December 20	Equipment A/c	$     159,180
	To Cash A/c		$     159,180
	(Being equipment purchased for $ 152,800 (net of 2% cash discount), freight paid $ 6300 for equipment)

Purchase price of Equipment is $ 156,000 which is being paid in cash. Cash discount of 2% is available. Cost to be capitalised should include all the discounts which are availed, so the asset will be recorded at net price i.e. net of discounts.

Cash discount = $156,000 * 2% = $ 3,120

Net price purchase paid = $ 156,000 - $3,120 = $ 152,880

Freight is paid for $ 6,300. Any expense paid to bring the assets to its place for put to use are capitalised to the cost of asset, hence freight paid will be capitalised to the cost of equipment.

Cost of equipment will be total of net purchase price + freight amount

= $152,880 + $ 6300 = $ 159,180