Question

Sheridan 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 $200,000 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		$200,000			$100,000			$100,000			$180,000
Equipment		120,000			20,000			100,000			60,000

Asset 3: This machine was acquired by making a $20,000 down payment and issuing a $60,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $30,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $71,800.

Asset 4: This machinery was acquired by trading in used machinery. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.

Cost of machinery traded		$200,000
Accumulated depreciation to date of sale		80,000
Fair value of machinery traded		160,000
Cash received		20,000
Fair value of machinery acquired		140,000

Asset 5: Equipment was acquired by issuing 100 shares of $16 par value common stock. The stock had a market price of $22 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of $300,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.

Date		Payment
2/1		$240,000
6/1		720,000
9/1		960,000
11/1		200,000

To finance construction of the building, a $1,200,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $400,000 of other outstanding debt during the year at a borrowing rate of 8%.

Record the acquisition of each of these assets.

Answer 1

Journal entries for acquisition of the assets
Asset 1 and 2
Name of the account	Debit	Credit
Machinery A/c	$150,000
Equipment A/c	$50,000
To Cash A/c		$200,000
Calculation:
Asset	Book Value on Seller's Books	Appraised Value
Machinery	$100,000	$180,000
Equipment	$100,000	$60,000
Total	$200,000	$240,000
Total Consideration paid = $200,000
The cash consideration should be apportioned between the two assets on appraised value basis
Machinery Value = $200,000 * $180,000 / $240,000 = $150,000
Equipment Value = $200,000 * $60,000 / $240,000 = $50,000
Asset 3
Name of the account	Debit	Credit
Machinery A/c	$71,800
Discount on Note payable A/c	$8,200
To Cash A/c		$20,000
To Note Payable		$60,000
Calculation:
Cash Paid - $20,000
Notes payable - $60,000
Estimated fair value - $71,800
Difference - $8,200 (Discount)
Asset 4
Name of the account	Debit	Credit
Machinery A/c	$140,000
Accumulated Depreciation on Machine traded	$80,000
Cash A/c	$20,000
To Machinery A/c		$200,000
To Gain on Disposal		$40,000
Calculation:
Gain on Disposal:
Cost of machine traded	$200,000
Less: Accumulated Depreciation	$80,000
Book Value	$120,000
Fair Value of machine traded	$160,000
Gain on Disposal	$40,000
Asset 5
Name of the account	Debit	Credit
Equipment A/c	$2,200
To Common Stock		$1,600
To Addl. Paid in Capital		$400
Calculation:
Equipment Value (100 shares @$22)	$2200
Common Stock (100 Shares @$16)	$1600
Addl. Paid in Capital (100shares @ $4)	$400
Asset 6
Name of the account	Debit	Credit
land A/c	$300,000
Building A/c	$2,196,800
To Cash A/c		$2,420,000
To Interest Expense A/c		$76,800
Calculation:
Total Cash Expense
Land	$300,000
Payments to Contractor
2/1	$240,000
6/1	$720,000
9/1	$960,000
11/1	$200,000
Total Cash Expense	$2,420,000
Weighted Average cost of capital expenditure
Date of Payment	Amount	No.of Periods	Weighted Avg. Cost
2/1	$240,000	9/12	$180,000
6/1	$720,000	5/12	$300,000
9/1	$960,000	2/12	$160,000
11/1	$200,000	0/12	0
			$640,000
The capitalisation is for 9 Months only
Interest expense = $640,000 * 12% = $76,800
Building Value = Total Payments to be recognised + Interest expense
= $2,120,000 + $76,800
=$2,196,800