Question

Marigold 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 $160,000 cash. The following information was gathered.

Description		Initial Cost on Seller’s Books			Depreciation to Date on Seller’s Books			Book Value on Seller’s Books			Appraised Value
Machinery		$160,000			$80,000			$80,000			$144,000
Equipment		96,000			16,000			80,000			48,000

Asset 3: This machine was acquired by making a $16,000 down payment and issuing a $48,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $24,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $57,440.

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		$160,000
Accumulated depreciation to date of sale		64,000
Fair value of machinery traded		128,000
Cash received		16,000
Fair value of machinery acquired		112,000

Asset 5: Equipment was acquired by issuing 100 shares of $13 par value common stock. The stock had a market price of $18 per share.

Construction of Building: A building was constructed on land purchased last year at a cost of $240,000. Construction began on February 1 and was completed on November 1. The payments to the contractor were as follows.

Date		Payment
2/1		$192,000
6/1		576,000
9/1		768,000
11/1		160,000

To finance construction of the building, a $960,000, 12% construction loan was taken out on February 1. The loan was repaid on November 1. The firm had $320,000 of other outstanding debt during the year at a borrowing rate of 8%.

Record the acquisition of each of these assets. (Round intermediate calculations to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places e.g. 58,971. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
Acquisition of Assets 1 and 2
Acquisition of Asset 3
Acquisition of Asset 4
Acquisition of Asset 5
(To record acquisition of Office Equipment)

Answer 1

Answer:- In the books of Marigold industries

Journal entry

Description. Debit. Credit

Machinery. $80000

Equipment. $80000

To Cash. $160000

(Being Asset 1 & 2 acquired for Cash )

Machinery $ 64000

To Cash. $16000

To Note payable. $48000

(Being Asset 3 acquired)

Machinery. $84000

Cash $16000

To Old Machinery (book value). $96000

To Gain on Asset. $4000

(Being Asset 4 acquired)

Equipment (100 @$18). $1800

To Common stock (100@$13). $1300

To Additional paid in Capital. $500 (Being Asset 5 purchased)

Building $1696000

To Cash $1696000

(Being building constructed)

Working Note :-

Asset 4:-

Gain :- fair value of old Asset - cost value of Asset

= $128000-$96000 = $32000

Percentage of gain = cash received/fair value of old Asset

= $16000/$128000 = 12.5%

Since gain is less than 25% and exchange lacks lack commercial substance then gain is recognized on proportional basis

Proportional gain = Total gain * percentage of gain

= 32000 *12.5% = $4000

Cost of new Machinery acquired =book value of old Asset + gain - Cash received

$96000+$4000-$16000 = $84000