Question

E10-16B (L03,4) (Asset Acquisition) Ogden Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Asset 3

This machine was acquired by making a $25,000 down payment and issuing a $75,000, 1-year, zero-interest-bearing note. The note is to be paid off in at the end of the first year. It was estimated that the asset could have been purchased outright for $91,000.

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

Machinery was acquired by issuing 1,000 shares of $1 par value common stock. The stock was actively traded and had a market value of $7 per share.

Construction of Building

A building was constructed on land purchased last year 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.

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%.

Instructions

Record the acquisition of each of these assets.

Construction loan-15% interest, payable semiannually, issued December 31, 2016 Short-term loan-10% interest, payable monthly, and principal payable at maturity on May 30, 2018 Long-term loan-11% interest, payable on January 1 of each year. Principal payable on January 1, 2021 $1,000,000 700,000 500,000 Cost of machinery traded Accumulated depreciation to date of sale Fair value of machinery traded Cash received $150,000 60,000 96,000 20,000 76,000 Fair value of machinery acquired Date Payment $200,000 300,000 100,000 400,000

Answer 1

Asset no.	Accounts	debit	credit
1 & 2	Machinery	148800
	office equipment	37200
	cash		186000
	(186000*160000/(160000+40000))
	(186000*40000/(160000+40000))
3	Machinery	91000
	Notes payable		66000
	cash		25000
4	Machinery	70000
	Accumulated depreciation	60000
	cash	20000
	machinery		150000
5	Office equipment	7000
	share capital(1000*1)		1000
	share premium		6000
	Building	1028500
	Land	120000
	cash		1120000
	interest expense		28500
	working:
note			weighted
date		time	amounts
Mar-01	120000	6/12	60000
Mar-01	200000	6/12	100000
May-01	300000	4/12	100000
Jun-01	100000	3/12	25000
Sep-01	400000
total	1120000		285000
interest expense
	285000*0.1	28500