– Problem 1 – Murphy Co. purchased equipment on September 1, 2017. The company g
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Question
– Problem 1 –
Murphy Co. purchased equipment on September 1, 2017. The company gave a down payment of $30,000 and signed a 6-year promissory note for the balance due. The note requires Murphy to make annual payments of $13,620 with the first payment due September 1, 2018. The prevailing market rate of interest for comparable instruments is 9%. Apart from this transaction, the fair value of the new equipment is not determinable.
REQUIRED: Give the entry to record Murphy’s purchase.
– Problem 2 –
On February 10, 2017, Wilson Co. hired DEB Co. to construct a new headquarters building. The construction work commenced on May 1, 2017, and it is expected to continue through April 30, 2019. Wilson made progress payments to the contractor in 2017 as follows:
Date
Amount
May 1
$ 376,000
June 1
621,000
October 1
295,000
December 1
763,000
$2,055,000
Wilson took a $595,000 construction loan on May 1, 2017. The loan principal is due in full on April 30, 2019. Interest on the loan is incurred at the annual rate of 6%, payable monthly starting May 31, 2017. In addition to the construction loan, Wilson had the following debt outstanding throughout 2017:
Description
Principal
2-year, 7% note payable with interest payable annually
$350,000
5-year, 11% note payable with interest payable annually
$900,000
REQUIRED: Compute the interest to be capitalized by Wilson for 2017. Also, give the adjusting entry to record Wilson’s capitalization of interest.
– Problem 3 –
Honeycutt Co. recently engaged in an exchange of equipment with ABC Co. The following information pertains to the equipment each company owned immediately before the exchange:
Honeycutt Co.
ABC Co.
Equipment cost
$431,675
$263,140
Accumulated depreciation
147,920
84,510
Fair value
269,360
218,855
In addition, Honeycutt received $50,505 cash from ABC.
REQUIRED: Give the entry Honeycutt Co. must make to account for this exchange. Assume the exchange has commercial substance.
– Problem 4 –
Glendenning Co. recently engaged in an exchange of buildings with XYZ Co. The following information pertains to the building each company owned immediately before the exchange:
Glendenning Co.
XYZ Co.
Building cost
$839,470
$742,190
Accumulated depreciation
396,115
235,680
Fair value
512,750
455,322
In addition, Glendenning received $57,428 cash from XYZ.
REQUIRED: Give the entry Glendenning Co. must make to account for this exchange. Assume the exchange lacks commercial substance.
Date
Amount
May 1
$ 376,000
June 1
621,000
October 1
295,000
December 1
763,000
$2,055,000
Explanation / Answer
Problem 1.
Purchase A/c dr 1,11,720
Bills Payable cr 81,720 ( 13620 x 6 )
Cash cr 30,000
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