Nash Company, a manufacturer of ballet shoes, is experiencing a period of sustai
ID: 2573692 • Letter: N
Question
Nash Company, a manufacturer of ballet shoes, is experiencing a period of sustained growth. In an effort to expand its production capacity to meet the increased demand for its product, the company recently made several acquisitions of plant and equipment. Rob Joffrey, newly hired in the position of fixed-asset accountant, requested that Danny Nolte, Nash’s controller, review the following transactions.
Transaction 1: On June 1, 2017, Nash Company purchased equipment from Wyandot Corporation. Nash issued a $29,200, 4-year, zero-interest-bearing note to Wyandot for the new equipment. Nash will pay off the note in four equal installments due at the end of each of the next 4 years. At the date of the transaction, the prevailing market rate of interest for obligations of this nature was 9%. Freight costs of $383 and installation costs of $450 were incurred in completing this transaction. The appropriate factors for the time value of money at a 9% rate of interest are given below.
Transaction 2: On December 1, 2017, Nash Company purchased several assets of Yakima Shoes Inc., a small shoe manufacturer whose owner was retiring. The purchase amounted to $230,000 and included the assets listed below. Nash Company engaged the services of Tennyson Appraisal Inc., an independent appraiser, to determine the fair values of the assets which are also presented below.
Yakima Book Value
Fair Value
$60,000
$50,000
41,700
79,000
71,400
121,000
$173,100
$250,000
During its fiscal year ended May 31, 2018, Nash incurred $7,900 for interest expense in connection with the financing of these assets.
Transaction 3: On March 1, 2018, Nash Company exchanged a number of used trucks plus cash for vacant land adjacent to its plant site. (The exchange has commercial substance.) Nash intends to use the land for a parking lot.
The trucks had a combined book value of $37,510, as Nash had recorded $19,320 of accumulated depreciation against these assets. Nash’s purchasing agent, who has had previous dealings in the secondhand market, indicated that the trucks had a fair value of $45,490 at the time of the transaction. In addition to the trucks, Nash Company paid $18,500 cash for the land.
(b) For each of the three transactions described above, determine the value at which Nash Company should record the acquired assets. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places e.g. 58,971.)
Explanation / Answer
Four equal instalments = 29200/4 = $7300
Now, present value of an ordinary annuity for 4 years at 9% is 3.24 as per given table
Hence the present value would be = $ 7,300 * 3.24
= 23,652
Equipment cost = Present value + other charges
= 23652 + 383 + 450
= 24,485
Nash company will record this asset at a value of $ 24,485
Purchase price of all assets combined is $ 230,000 whereas its fair value is $250,000. Here we shall record the assets at purchase price or fair value whichever is less. Hence will record asset at a value of $ 230,000 + interest cost of $ 7,900. Hence the total cost would be $237,900.
(Note: Since purchase value and interest cost of each asset is not given separately, I have written total value. Each asset shall be recorded on its purchase price in the books of Nash company and the interest cost shall be added to the asset for which it is relevant. If interest cost is relevant to all assets, we can charge it on proportional basis to each asset.)
Value of vacant land = fair market value of trucks + cash paid
= 45490 + 18500
= 63,990.
Hence the value of vacant land to be recorded in the books of Nash shall be $ 63,990.
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