Question

Brown Company paid cash to purchase the assets of Coffee Company on January 1, 2019. Information is as follows: Total cash paid $4,500,000 Assets acquired: Land $800,000 Building $700,000 Machinery $800,000 Patents $700,000 The building is depreciated using the double-declining balance method. Other information is: Salvage value $70,000 Estimated useful life in years 20 The machinery is depreciated using the units-of-production method. Other information is: Salvage value, percentage of cost 10% Estimated total production output in units 100,000 Actual production in units was as follows: 2019: 20,000 2020: 20,000 2021: 30,000 The patents are amortized on a straight-line basis. They have no salvage value. Estimated useful life of patents in years 40 On December 31, 2020, the value of the patents was estimated to be $100,000 Where applicable, the company uses the ½ year rule to calculate depreciation and amortization expense in the years of acquisition and disposal. Its fiscal year-end is December 31. The machinery was traded on December 2, 2021 for new machinery. Other information is: Fair value of old machinery $400,000 Trade-in allowance $600,000 List price for new machinery $840,000 Estimated useful life of new machinery in years 10 Estimated salvage value of new machinery $8400 The new machinery if depreciated using the stright-line method and ½ year rule. On August 14, 2023, an addition was made. This amount was material. Other relevant information is as follows: Amount of addition, paid in cash $400,000 Number of years of useful life from 2023 (original machinery and addition): 20 Salvage value, percentage of addition 10% Required: Prepare journal entries to record: 1 The purchase of the assets of Coffee. 2 Depreciation and amortization expense on the purchased assets for 2019. 3 The decline (if any) in value of the patents at December 31, 2020. 4 The trade-in of the old machinery and purchase of the new machinery. 5 Depreciation on the new machinery for 2021. 6 Cost of the addition to the machinery on August 14, 2023. 7 Depreciation on the new machinery for 2023.

Answer 1

SOLUTION:-1
Journal Entries
In the books of Brown company
S. No	Date	Account Title	Debit	Credit
1	1/1/2019	Land A/c	$800,000
		Building A/c	$700,000
		Machinery A/c	$800,000
		Patents A/c	$700,000
		Goodwill A/c(Balancing in Figure)	$1,500,000
		Cash		$4,500,000
		(To Record Assets Purchased)
Note :-	Goodwill is Excess Amount paid for acquisation of Assets
SOLUTION:-2
Journal Entries
S. No	Date	Account Title	Debit	Credit
2	31-12-2019	Depreciation A/c	$231,500
		Building		$70,000
		Machinery		$144,000
		Patents		$17,500
		(Being depreciation charged for the year)
	Calculation Of Depreciation
	1	Building Depreciation
	=	2*($700000/20)
		$70,000.00
	2	Machinery Depreciation
		($800000-$80000)*($20000/$100000)
		($720000*.2)
		$144,000.00
	3	Patents Depreciation
		($700000/40)
		$17,500.00
SOLUTION:-3
Journal Entries
S. No	Date	Account Title	Debit	Credit
3	31-12-2020	Amortisation Expenses	$565,000
		Patents A/c		$565,000
		(Being patents value Depreciated to $100000 from $700000)
Patents Value has decreased to $100000
SOLUTION:-4
Journal Entries
S. No	Date	Account Title	Debit	Credit
4	2/12/2021	New Machinery A/c($400000+$240000)	$640,000
		old Machinery		$400,000
		cash($840000-$600000)		$240,000
		(Being old machinery traded for new machinery)
Notes :-
Cash Paid For New Machinery =List Price -Trade Allowances
	=	($840000-$600000)
	=	$240,000
Cost Of New Machinery =Cash Paid +Assets Given Up
	=	$240000+$400000
	=	$640,000
SOLUTION:-5
Journal Entries
S. No	Date	Account Title	Debit	Credit
5	31-12-2021	Depreciation A/c	$31,580
		To New Machinery		$31,580
		(Being Asset depreciated on ½ rule)
Note:-	As per ½ year rule Depreciation will be calculated for 6 month as the assets has been purchased in the second half of the year
	Machinery Depreciation
		{($640000-$8400)/10}*6/12
		$31,580