Question

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows:

Total cash paid $2,990,000

Assets acquired:

Land $600,000

Building $600,000

Machinery $500,000

Patents $600,000

The building is depreciated using the double-declining balance method. Other information is:

Salvage value $60,000

Estimated useful life in years 30

The machinery is depreciated using the units-of-production method. Other information is:

Salvage value, percentage of cost 10%

Estimated total production output in units 400,000

Actual production in units was as follows:

2019: 40,000

2020: 80,000

2021: 120,000

The patents are amortized on a straight-line basis. They have no salvage value.

Estimated useful life of patents in years 20 On December 31, 2020, the value of the patents was estimated to be $900,000

Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31.

The machinery was traded on December 2, 2021 for new machinery. Other information is:

Fair value of old machinery $240,000

Trade-in allowance $336,000

List price for new machinery $504,000

Estimated useful life of new machinery in years 20

Estimated salvage value of new machinery $15,120

The new machinery if depreciated using the stright-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows:

Amount of addition, paid in cash $100,000

Number of years of useful life from 2023 (original machinery and addition): 20

Salvage value, percentage of addition 10%

Required: Prepare journal entries to record:

1 The purchase of the assets of Coffee.

2 Depreciation and amortization expense on the purchased assets for 2019.

3 The decline (if any) in value of the patents at December 31, 2020.

4 The trade-in of the old machinery and purchase of the new machinery.

5 Depreciation on the new machinery for 2021.

6 Cost of the addition to the machinery on August 14, 2023.

7 Depreciation on the new machinery for 2023.

Answer 1

Prepare the journal entries as follows: Date Account name and explanation Debit($) Credit($) 1/1/2019 Land $600,000 Building $600,000 Machinery $500.000 Patents $600,000 Goodwill $690,000 Cash $2,990,000 $102,000 31/12/19 Depreciation Acc. Dep-Building Acc. Dep-Machinery Acc. Dep-Patents $40,000 $45,000 $30,000 $360,000 1/12/2021 Patents Appreciation in value $360,000 $408.000 2/12/2021 New machinery Machinery Cash $240,000 $168,000 $9.822 31/12/21 Depreciation Acc Dep-machinery $9,822 14/8/23 $100.000 New machinery Cash $100,000 31/12/23 Depreciation Acc. Dep-Machinery $20,420.7 Notes: Goodwill is excess amount paid for acquisition of assets. Goodwill-Consideration-Land-Building Machinery-Patents = 990,000-600,000-600.000-500,000-600,000 = $690,000

Building depreciation has been computed as follows: Building depreciatior 2 x 5600.000 30 -540,000 Machinery depreciation has been computed as follows: Machinery depreciatior $500,000-$50,000 x 40.000 400,000 = 545,000 Patent depreciation has been computed as follows: Patent depreciatiore 5600.000 =$30,000 Patent value has increased to $900,000 Cash paid for new machinery is computed as follows Cash paid =List price - tradein allowance =$504,000-$336,000 =$ 168,000 Cost of new machine =Cash paid - Asset given up =$168,000+$240,000 =$408,000 As per 12 year rule, depreciation will be calculated for 6 moths as the asset has been purchased in the second half of the year. Machinery depreciation S408,000-$15.120 x6 20x12 =$9822

Depreciation for 2023 is computed as follows For new addition Machinery depreciation=$100,000-$10,00 -X6 20x12 =$2250 For existing machine Machinery depreciation=- _$378532-S 15120 20x12 =S18170.7 Total depreciation is $20420.7. 20 years has been estimated again as on 2023.WDV has been computed as follows: WDV =S408,000+ ( 59822XL) =$378,534 Total depreciation is $20420.7.