Ex. 10-135-Nonmonetary Exchange

Ex. 10-135—Nonmonetary exchange.
Equipment that cost $240,000 and has accumulated depreciation of $189,000 is exchanged for
equipment with a fair value of $96,000 and $24,000 cash is received. The exchange lacked
commercial substance.
Instructions
(a) Show the calculation of the gain to be recognized from the exchange.
(b) Prepare the entry for the exchange. Show a check of the amount recorded for the new
equipment.
Solution 10-135
(a) Cost $240,000
Accumulated depreciation (189,000)
Book value 51,000
Fair value ($96,000 + $24,000) 120,000
Gain $69,000
Gain recognized (24/120 × $69,000) $ 13,800
(b) Accumulated Depreciation—Equipment................................... 189,000

Equipment................................................................................ 40,800
Cash........................................................................................ 24,000
Equipment.................................................................... 240,000
Gain on Disposal of Equipment.................................... 13,800
Check:
Fair value $96,000
Less deferred gain (55,200)
Basis of new equipment $40,800
Ex. 10-136—Donated assets.

Cheng Company has recently decided to accept a proposal from the City of Bel Aire that
publicly owned property with a large warehouse located on it will be donated to Cheng if Cheng
will build a branch plant in Bel Aire. The appraised value of the property is $350,000 and of the
warehouse is $700,000.
Instructions
Prepare the entry by Cheng for the receipt of the properties.
Solution 10-136
Buildings (Warehouse).................................................................... 700,000
Land................................................................................................ 350,000
Contribution Revenue.......................................................... 1,050,000
Ex. 10-137—Capitalizing vs. Expensing.
Consider each of the items below. Place the proper letter in the blank space provided to indicate
the nature of the account or accounts to be debited when recording each transaction using the
preferred accounting treatment. Prepayments should be recorded in balance sheet accounts.
Disregard income tax considerations unless instructed otherwise.
a. asset(s) only
b. accumulated amortization, depletion, or depreciation only
c. expense only
d. asset(s) and expense
e. some other account or combination of accounts
______1. A motor in one of North Company’s trucks was overhauled at a cost of $600. It is
expected that this will extend the life of the truck for two years.
______2. Machinery which had originally cost $130,000 was rearranged at a cost of $450,
including installation, in order to improve production.
______3. Orlando Company recently purchased land and two buildings for a total cost of
$35,000, and entered the purchase on the books. The $1,200 cost of razing the
smaller building, which has an appraisal value of $6,200, is recorded.
______4. Jantzen Company traded its old machine with a net book value of $3,000 plus cash
of $7,000 for a new one which had a fair market value of $9,000.
______5. Jim Parra and Mary Lawson, maintenance repair workers, spent five days in
unloading and setting up a new $6,000 precision machine in the plant. The wages
earned in this five-day period, $480, are recorded.
______6. On June 1, the Milton Hotel installed a sprinkler system throughout the building at a
cost of $13,000. As a result the insurance rate was decreased by 40%.
______7. An improvement, which extended the life but not the usefulness of the asset, cost
$6,000.
______8. The attic of the administration building was finished at a cost of $3,000 to provide an
additional office.
______9. In March, the Lyon Theatre bought projection equipment on the installment basis.
The contract price was $23,610, payable $5,610 down, and $2,250 a month for the
next eight months. The cash price for this equipment was $22,530.
______10. Lambert Company recorded the first year’s interest on 6% $100,000 ten-year bonds
sold a year ago at 94. The bonds were sold in order to finance the construction of a
hydroelectric plant. Six months after the sale of the bonds, the construction of the
hydroelectric plant was completed and operations were begun. (Only cash interest,
and not discount amortization, is to be considered.)
Solution 10-137
1. b 6. a
2. a or c 7. b
3. a 8. a
4. e 9. e
5. a 10. d
PROBLEMS
Pr. 10-138—Capitalizing acquisition costs.
Gibbs Manufacturing Co. was incorporated on 1/2/12 but was unable to begin manufacturing
activities until 8/1/12 because new factory facilities were not completed until that date. The Land
and Buildings account at 12/31/12 per the books was as follows:
Date Item Amount
1/31/12 Land and dilapidated building $200,000
2/28/12 Cost of removing building 4,000
4/1/12 Legal fees 6,000
5/1/12 Fire insurance premium payment 5,400
5/1/12 Special tax assessment for streets 4,500
5/1/12 Partial payment of new building construction 170,000
8/1/12 Final payment on building construction 170,000
8/1/12 General expenses 30,000
12/31/12 Asset write-up 75,000
$664,900
Additional information:
1. To acquire the land and building on 1/31/12, the company paid $100,000 cash and 1,000
shares of its common stock (par value = $100/share) which is very actively traded and had a
fair value per share of $140.
2. When the old building was removed, Gibbs paid Kwik Demolition Co. $4,000, but also
received $1,500 from the sale of salvaged material.
3. Legal fees covered the following:
Cost of organization $2,500
Examination of title covering purchase of land 2,000
Legal work in connection with the building construction 1,500
$6,000
4. The fire insurance premium covered premiums for a three-year term beginning May 1, 2012.
5. General expenses covered the following for the period 1/2/12 to 8/1/12.
President's salary $20,000
Plant superintendent covering supervision of new building 10,000
$30,000
6. Because of the rising land costs, the president was sure that the land was worth at least
$75,000 more than what it cost the company.
Instructions
Determine the proper balances as of 12/31/12 for a separate land account and a separate
buildings account. Use separate T-accounts (one for land and one for buildings) labeling all the
relevant amounts and disclosing all computations.

Ex. 10-135-Nonmonetary Exchange

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Ex. 10-135—Nonmonetary exchange.

Gain recognized (24/120 × $69,000) $ 13,800

(b) Accumulated Depreciation—Equipment................................... 189,000

Ex. 10-136—Donated assets.

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