Question

1. Han Industries Inc. constructed a building and acquired five assets during the current year.

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

Date          Payment

March 1 $360,000

July 1        275,000

October 1 325,000

Han obtained a $700,000, 8% construction loan on March 1. Han repaid the loan on October 1. Han had $400,000 of other outstanding debt during the year at a borrowing rate of 9%.

Asset 1: Han acquired office furniture by making a $7,500 down payment and issuing a $10,000, 2-year, zero-interest-bearing note. The note is to be paid off in two $5,000 installments made at the end of the first and second years. It was estimated that the asset could have been purchased outright for $16,200.

Asset 2: Han acquired manufacturing equipment by trading in used manufacturing equipment. (The exchange lacks commercial substance.) Facts concerning the trade-in are as follows.

Cost of equipment traded in                    $52,000

Accumulated depreciation on equipment

traded in - to date of sale	34,000
Fair value of equipment traded	25,000
Cash received	2,500
Fair value of equipment acquired	22,500

Asset 3: Four computers were acquired by issuing 500 shares of $1 par value common stock. The stock had a market price of $12 per share.

Assets 4 and 5: Han purchased these assets together for a lump sum of $230,000 cash. The following information was gathered.

Initial Cost onDepreciation to Date onBook Value on

DescriptionSeller's Books            Seller's Books            Seller's BooksAppraised Value

Forklifts	$75,000	$20,000	$55,000	$50,000
Equipment	180,000	40,000	140,000	165,000
Trucks	65,000	15,000	50,000	35,000

Instructions

Record the acquisition of each of these assets.

Answer 1

March 1

Bank A/c ---------------------------Dr                    $700000/-

To Bank Loan A/c (Construction Loan) ---------------------Cr       $700000/-

(Being Construction Loan @ 8% received)

March 1

Building WIP A/c-------------------Dr                    $360000/-

To Contractor A/c --------------------------------------------Cr             $360000/-

(Being invoice received from Contractor for construction of Building)

Contractor A/C---------------------Dr                   $360000/-

To Bank A/c ---------------------------------------------------Cr              $360000/-

(Being Payment made to contractor for building work WIP)

July 1

Building WIP A/c-------------------Dr                    $275000/-

To Contractor A/c --------------------------------------------Cr             $275000/-

(Being invoice received from Contractor for construction of Building)

Contractor A/C---------------------Dr                   $275000/-

To Bank A/c ---------------------------------------------------Cr              $275000/-

(Being Payment made to contractor for building work WIP)

Oct 1

Building WIP A/c-------------------Dr                    $325000/-

To Contractor A/c --------------------------------------------Cr             $325000/-

(Being invoice received from Contractor for construction of Building)

Contractor A/C---------------------Dr                   $325000/-

To Bank A/c ---------------------------------------------------Cr              $325000/-

(Being Payment made to contractor for building work WIP)

Building A/c ---------------------------Dr                       $960000/-

To Building WIP A/c ------------------------------------------------Cr        $960000/-

(Being construction completed on Oct 1 and hence transfer to building WIP A/c to Assets account)

Bank Loan A/c --------------------------Dr                  $700000/-

Interest A/c -----------------------------Dr                  $ 32667/-

To Bank A/c---------------------------------------------------------Cr          $732667/-

(Being repayment of Loan @ 8% interest PA)

Party to purchase furniture A/c --------------Dr     $7500

To Bank A/c -------------------------------------------------------Cr      $7500/-

(Being Advance made to purchase of furniture)

Furniture A/c -----------------------------------------Dr      $16200/-

To Party to purchase Furniture A/c -----------------------------Cr      $7500/-

To Notes Payable ----------------------------------------------------Cr      $8700/-

(Being Assets Purchase by issuing notes please note that Interest that will occur on notes in the future is not recorded at the time of the purchase)

The Manufacturing Equipment should be recorded at fair value. Because this amount is more than the net book value of the old Equipment, a gain is recorded for the difference:

Accumulated Depreciation A/c ----------------Dr       $34000/-

Manufacturing Equipment----------------------Dr        $22500/-

To Gain----------------------------------------------------------------Cr      $4500/-

To Equipment ------------------------------------------------------Cr      $52000/-

(Being Remove of all accounts related to the old equipment, set up the new boat at its fair value and record the balancing gain)

Assets 3

The fair market value of the common stock is more readily determinable than the fair market value of the Four Computer. As the result, the company should record the Computer for $6000/- (i.e., 500 shares x $12) in its books.

Computers A/c --------------------------------------------------Dr           $6000/-

To Common Stock A/c-----------------------------------------------------------Cr      $500/-

To Paid-in Capital in Excess of Par Value-----------------------------------Cr   $5500/-

(Being Computer Purchase by issuing common stock)

Assets 4 & 5

Fixed assets purchased for lump-sum are therefore recorded at a value calculated using the following formula:

Value of Asset =	Fair Value of the Asset	× Lumpsum Paid
	Fair Value of all the Assets Purchased

Forklifts A/c-------------------------------------------------Dr       $46000/-

Equipment A/c --------------------------------------------Dr        $151800/       

Trucks A/c---------------------------------------------------Dr        $32200/-

To Cash ------------------------------------------------------------------------Cr $230000/-

(Being Lump sum cash paid to acquire assets)