Wild Expansion Co. acquired the following assets in exchange for various nonmone
ID: 2471482 • Letter: W
Question
Wild Expansion Co. acquired the following assets in exchange for various nonmonetary assets. 2015 Mar. 15 Acquired from another company a large lathe in exchange for three small lathes. The small lathes had a total cost of $28,000 and a remaining book value of S15,000. The new lathe had a market value of $23,000, approximately the same value as the three small lathes. This transaction is deemed NOT to have commercial substance. June 1 Acquired 175 acres of land by issuing 3,200 shares of common stock with par value of $1 and market value of $75. Market andlysis reveals that the market value of the stock was a reasonable value for the land. July 15 Acquired a used piece of heavy, earth-moving equipment, market value, $120,000, by exchanging a used molding maxhine with a market value of $20,000 (book value, $12,000; cost, $50,000) and land with a market value of $135,000 (cost, $110,000). Cash of $35,000 was received by Wild Expansion Co. as part of the transaction. Aug. 15 Acquired a patent, franchise, and copyright for two used milling maxhines. The book value of each milling maxhine was $4,000. and each originally cost $8,500. The market value of each maxhine is $9,000. It is estimated that the patent and franchise have about the same market values, and the market value of the copyright is 50% of the market value of the patent. Nov. 1 Acquired a new packaging maxhine for four old packaging maxhines. The old maxhines had a total cost of $72,000 and a total remaining book value of $20,000. The new packaging maxhine has an indicated market value of $60,000, approximately the same value as the four maxhines. This transaction is deemed to have commercial substance. Instructions: Prepare the journal entries required on Wild Expansion Co.'s books to record the exchanges.Explanation / Answer
Date
Account Titles and Explanation
Debit
Credit
Mar 15, 2015
Lathe A/c Dr.
$ 15,000
Accumulated Depreciation A/c Dr.
$ 13,000
To Old Lathes A/c
$ 28,000
(Record Exchange of Lathes)
Jun 1, 2015
Land A/c Dr.
$240,000
To Common Stock A/c
$ 3,200
To Paid-in Capital in excess of Par Value A/c
$236,800
(Record acquisition of land and issue of common stock)
Jul 15, 2015
Earth-Moving Equipment A/c Dr.
$120,000
Cash A/c Dr.
$ 35,000
Accumulated Depreciation A/c Dr.
$ 38,000
To Molding Machine A/c
$ 50,000
To Land A/c
$110,000
To Gain on exchange of molding machine A/c
$ 8,000
To Gain on exchange of Land A/c
$ 25,000
(Record exchange of assets and recognize gain)
Aug 15, 2015
Patent A/c Dr.
$ 7,200
Franchise A/c Dr.
$ 7,200
Copyright A/c Dr.
$ 3,600
Accumulated Depreciation A/c Dr.
$ 9,000
To Milling Machines A/c
$ 17,000
To Gain on exchange of milling machines A/c
$ 10,000
(Record acquisition of patent, franchise and copyrights and recognize gain on exchange of assets)
Nov 1, 2015
Packaging Machine A/c Dr.
$ 60,000
Accumulated Depreciation A/c Dr.
$ 52,000
To Packaging Machine A/c
$ 72,000
To Gain on exchange of packaging machine A/c
$ 40,000
(Record exchange of assets and recognize gain)
Mar 15 - As per US GAAP, when there is no commercial substance, Gains are not recognized in the case of exchange of similar assets.
Here Book value of the 3 small lathes is $15,000. Fair Market Value of new lathe is $23,000 which is same as the 3 small lathes. As the fair market value is greater than the book value, there will be a gain in this transaction. This gain will not be recognized. So cost of the new lathe will be book value of 3 small lathes exchanged.
Jun 1 – Market value of per share is $75. Shares issued were 3,200. So the Fair Market Value of land is $75 * 3,200 = $240,000. Common Stock par value is $1. So the Capital in excess of par value will be $3,200 * ($75 - $1) = $236,800
Jul 15 – As per US GAAP, Cost of the asset acquired will be the fair market value of the asset surrendered + Cash paid – Cash Received.
Here fair market value of molding machine is $20,000. Fair market value of land is $ 135,000. Cash received is $35,000. So fair market value of the earth-moving equipment will be $20,000 + $135,000 - $35,000 = $120,000
Fair market value of molding machine is $20,000. Book value of the molding machine is $12,000. Gain on exchange is $20,000 - $12,000 = $8,000
Fair market value of land is $135,000. Book value of the land is $110,000. Gain on exchange is $135,000 - $110,000 = $25,000
Aug 15 – As discussed above, Cost of the asset acquired will be the fair market value of the asset surrendered.
Here fair market value of each machine is $9,000. Two machines were exchanged. So cost of the patent, franchise and copyrights will be $9,000 * 2 = $18,000
It is given that fair market value of patents and franchise is same. Fair market value of copyright is 50% of the market value of patent. So $18,000, need to be allocated in the ratio 2:2:1 or 40%, 40% and 20% for patent, franchise and copyright respectively.
Cost of the patent will be $18,000 * 40% = $7,200
Cost of the franchise will be $18,000 * 40% = $7,200
Cost of the copyright will be $18,000 * 20% = $3,600
Book value of the milling machines are $4,000 * 2 = $8,000
Gain on exchange is $18,000 - $8,000 = $10,000
Nov 1 – Same as above, Cost of the new packaging machine will be $60,000
Gain on Exchange will be $60,000 – $20,000 = $40,000
Date
Account Titles and Explanation
Debit
Credit
Mar 15, 2015
Lathe A/c Dr.
$ 15,000
Accumulated Depreciation A/c Dr.
$ 13,000
To Old Lathes A/c
$ 28,000
(Record Exchange of Lathes)
Jun 1, 2015
Land A/c Dr.
$240,000
To Common Stock A/c
$ 3,200
To Paid-in Capital in excess of Par Value A/c
$236,800
(Record acquisition of land and issue of common stock)
Jul 15, 2015
Earth-Moving Equipment A/c Dr.
$120,000
Cash A/c Dr.
$ 35,000
Accumulated Depreciation A/c Dr.
$ 38,000
To Molding Machine A/c
$ 50,000
To Land A/c
$110,000
To Gain on exchange of molding machine A/c
$ 8,000
To Gain on exchange of Land A/c
$ 25,000
(Record exchange of assets and recognize gain)
Aug 15, 2015
Patent A/c Dr.
$ 7,200
Franchise A/c Dr.
$ 7,200
Copyright A/c Dr.
$ 3,600
Accumulated Depreciation A/c Dr.
$ 9,000
To Milling Machines A/c
$ 17,000
To Gain on exchange of milling machines A/c
$ 10,000
(Record acquisition of patent, franchise and copyrights and recognize gain on exchange of assets)
Nov 1, 2015
Packaging Machine A/c Dr.
$ 60,000
Accumulated Depreciation A/c Dr.
$ 52,000
To Packaging Machine A/c
$ 72,000
To Gain on exchange of packaging machine A/c
$ 40,000
(Record exchange of assets and recognize gain)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.