Question

Exercise 10-16

Martinez Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Exercise 10-16 Martinez 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 $140,000 cash. The following information was gathered. Book Value on Seller's Books Description Machinery Equipment Initial Cost on Depreciation to Seller's BooksDate on Seller's Books $140,000 $70,000 84,000 14,000 $70,000 70,000 Appraised Value $126,000 42,000 Asset 3: This machine was acquired by making a $14,000 down payment and issuing a $42,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $21,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $50,260. 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 Accumulated depreciation to date of sale Fair value of machinery traded Cash received Fair value of machinery acquired $140,000 56,000 112,000 14,000 98,000 Asset 5: Equipment was acquired by issuing 100 shares of $11 par value common stock. The stock had a market price of $15 per share. Construction of Building: A building was constructed on land purchased last year at a cost of $210,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows. Date 2/1 6/1 Payment $ 168,000 504,000

Answer 1

Martinez Industries purchased the following assets and constructed a building as well. All this was done during the current year.

Asset 1 and 2

Date	Particulars	Debit	Credit
	Machinery	$ 105,000
	Office equipment	$ 35,000
	Cash		$ 140,000
	(To record purchase of machinery and office equipment)

The books of seller doesn’t determine the amount that buyer should record in its books. Both the assets have been purchased at once and the appraisal by buyer is $ 126,000 and $ 42,000. Since, the asset has been purchased for less, the appraisal value should be proportionately distributed.

Machinery = 126,000/(126000+42000) * 140,000 = $ 105,000

Office equipment = 42,000/(126000+42000) * 140,000 = $ 35,000

Asset 3

Date	Particulars	Debit	Credit
	Machinery	$ 50,260
	Discount on Notes Payable	$ 5,740
	Notes Payable		$ 42,000
	Cash		$ 14,000
	(To record purchase of machinery through notes issue)

The notes bear the interest factor. Although the notes issue value is $ 42,000, the asset shall be recorded at price at which it could be purchased. The estimated asset price without issue of note is $ 50,260. So, it shall be recorded at this amount of which $ 14000 is paid in cash. The discount on notes payable is also applicable

Asset 4

Date	Particulars	Debit	Credit
	Machinery (98000-24500)	$ 73,500
	Accumulated depreciation	$ 56,000
	Cash	$ 14,000
	Machinery		$ 140,000
	Gain on disposal of machinery		$ 3,500
	(To record exchange of machinery)

Since the exchange lacks commercial substance, a gain will be recognized in the proportion of cash received ($14,000/$112,000) times the $28,000 gain (FMV of $112,000 minus BV of $84,000). The gain recognized will then be $3,500 with $24,500 (28000-3500) of it being unrecognized and used to reduce the basis of the asset acquired.

Asset 5 :Office Equipment

Date	Particulars	Debit	Credit
	Office equipment	$1500
	Share capital-ordinary (100*$11)		$1100
	Share capital-premium (100*4)		$400
	(To record purchase of equipment)

Office equipment has been bought by issuing shares at $ 4 premium.

Asset 5: Land and Building

Date	Particulars	Debit	Credit
	Building ($1,988,000+$ 78,960)	$ 2,066,960
	Land	$ 210,000
	Cash (1,988,000+210,000)		$ 2,198,000
	Interest expense		$ 78,960
	(To record acquisition of land and building along capitalization of interest)

Total payments = 168,000+504,000+504,000+672,000+140,000 = $ 1,988,000

Date	Amount	Current Year capitalisation period	Weighted average Accumulated expe
1-Feb	168000	9/12	126000
1-Jun	504000	5/12	210000
1-Jun	504000	5/12	210000
1-Sep	672000	2/12	112000
1-Nov	140000	0/12	0
	$ 1988,000	Total	658000

As the expenditure is less than the loan taken, the weighted expenditure would be taken

Interest on loan to be capitalized = 658,000 *12% = $ 78,960

This interest needs to be capitalized as specifically taken to finance the construction. The debt taken won’t have any impact on building cost as it is not specific to building.